From Rouyn-Noranda, Quebec, 7:30 am eastern time
Gold had a volatile day yesterday, rebounding sharply after an intra-day tumble. As of 7:30 eastern time this morning, the yellow metal is up $4 to $1,234 and has traded within a range of $1,230 to $1,240. BMR’s technical analyst has a very bullish outlook on Gold but sees some back-and-forth action for a little while, including a re-test of yesterday’s low, before it’s ready to explode to new highs:
John: Yesterday, Gold (continuous contract) opened at $1226, fell to $1210 and then rocketed back up to a high of $1235, all in the space of 2 hours before settling down and closing at $1231 for a gain of $5. A wild day indeed. Watching this kind of volatility on a regular basis is confusing, frustrating and offers no insight as to what the Gold market is doing. In order to define what we may expect in the near future we have to consult a chart and analyze it with methodology such as the Elliott Wave Theory, Fibonacci levels, indicators and candlesticks.
First, a word about RN Elliott’s Wave Theory which states that a market follows a cycle made up of 8 “Waves”. This Wave structure occurs in both uptrends and downtrends and continues until the trend ends. The trend structure is composed of two phases – the Motive Phase and the Corrective Phase. The Motive Phase moves in the direction of the primary trend and consists of 5 Waves whereas the Corrective Phase consists of 3 Waves and moves countertrend.
Looking at the chart we see that on the left hand side a Corrective Phase starting at $1226 is shown as 3 blue zig-zag lines down to a low of $1045. This indicates of course the primary trend is up. At $1045 there is a bullish reversal and a Motive Phase starts, a series of 5 Waves up (green lines) until it reaches a peak of $1249. A reversal then occurs with a Corrective Phase down to $1155. This is followed by another reversal and a #1 Wave starts upward and climbs to $1237 at which point (last Friday, August 20) a bearish reversal 3 candle pattern called an “evening star” was formed. It was this pattern that alerted me to the possibility of a reversal on Monday. This pattern had to be confirmed by a down candle on Monday which indeed did occur. After the pattern was confirmed I placed on the chart the Fibonacci retracement levels because Wave #2 usually does not retrace Wave#1 more than the 61.8% level and typically the reversal occurs between the 38.2% and the 61.8% levels ($1,206 to $1,186), thus this can be considered a band of strong support. Yesterday’s trading went as low as $1210. I expect to see this support band tested before the reversal to start Wave #3.
Looking at the indicators:
The RSI shows that it is on the edge of the overbought region and must decline to a much lower level before Wave #3 can start in a similar manner to Wave #2 on the previous Motive Phase (i.e, the RSI dropped down to the 30% level before the reversal occurred (thin vertical blue lines). Similarly, the Slow Stochastics also has to decline down to about the 20% level before the reversal.
The ADX trend indicator shows the -DI (red line) is about to cross up over the +DI (green line) indicating the near term moves will be down. The ADX trend strength indicator (black line) is weak and flat. Note that this daily ADX does not indicate the strength of the Primary trend – the weekly ADX is used to determine that. The weekly ADX (not shown here) is strong and shows Gold is in an uptrend.
Outlook: The primary trend for Gold is up and is strong. We are likely to see some downside in the near future until Wave #2 is complete, then a reversal and the start of Wave #3 which is usually the longest and strongest wave of the Motive Phase.
