Gold Trends - Elliott Wave Analysis
A reader of my recent articles wrote me and pointed out the clear Elliott wave pattern evolving in gold. The Elliott wave principle can be difficult to apply due to the amount of "noise" in chart patterns and the ever-present danger of mistakes in interpretation; for these reasons I do not often attempt to apply it. However, I do understand it, and I was naturally very interested to see this clear pattern emerging in gold, which I believe has great predictive value.
For the benefit of those who understand Elliott Wave I will very briefly describe what is going on, those readers who don't can skip to the practical conclusions towards the end. Basically, the entire pattern that has formed in gold since it peaked in May - June is a large A-B-C correction to the major advance that occurred in the first half of the year. Superficially this formation resembles a top and there are a good many who think it is a top, and the action over the next few weeks is likely to reinforce their view that it is. But according to my interpretation of Elliott Wave it is not a top, despite the very deceptive nature of this formation.
Look now at the first chart, which shows the waves of larger order of magnitude. Here we can clearly see the first upleg of this primary bull market and the five waves comprising it, three impulse waves in the direction of the trend and two lesser reactionary waves. We can also see that wave 5 is what is known as an extended wave and itself clearly sub-divides into 5 wavelets, shown in the next chart. The big A-B-C correction to this primary upleg, which we are now approaching the end of, is actually close to being a "running correction" which is, believe it or not, a feature of a fast market. What this means is that, once this corrective phase is over, we are in for a very substantial advance.
The next chart also shows the waves of lower order of magnitude, starting from the extended fifth wave of the primary advance in the spring. This is very important, as the three waves of the A-B-C running correction appear to sub-divide into a 5 - 3 - 5 pattern of sub-waves. I am not entirely happy with the middle wave B - I have labelled three wavelets within it but done so by ignoring a small wavelet toward the top end of it, visible on these charts. If this is included, it would mean 5 waves in the B wave, which, if my understanding is correct, is against the rules. Otherwise the pattern is textbook stuff. Perhaps some Elliott wavers out there would care to comment. Please bear in mind that I may not be able to answer all mails for time reasons, but comments are appreciated. The A and B waves are complete and we are now in wave C, a down wave. I believe the point we reached at the end of last week saw the completion of wavelet 2, a counter-trend wave, within the down-trending C wave. If I am correct, then wavelet 3, a down wave, will soon take gold down to around $308, wavelet 4 will follow as a minor rally and the entire corrective phase will end with wavelet 5 taking gold back down to around $300, possibly a little lower. After that a powerful advance to new highs is expected, as the primary trend reasserts itself. To make it easier to see the sub-wave count in the A-B-C correction area, a close up view of the Dec gold chart is also provided below.
The good news is that, according to Elliott wave theory, we are in a powerful bull market. The bad news is that, in the short-medium term, which I would put at about one month, two months maximum, gold will likely remain weak and subject to selling back down to the $300 area. As many investors know only too well, gold stocks have been under-performing bullion recently and we can expect continued weakness in the final stages of this major correction. I believe now that there may be a terminal selloff in gold stocks as gold completes the C wave down, which I expect to break the uptrend that I had earlier, in an article about the HUI index about a week ago, expected to hold, a selloff which traders may wish to avoid. This final selloff will be the capitulation stage in gold shares, something which many expected in the general stockmarket, me included, and which never happened, but probably lies ahead. It will be a time of tremendous opportunity, for those who recognise it, as very soon after, I expect gold and gold shares to take off in a powerful advance to new highs. This powerful advance should see many exploration stocks, which looked technically very sound in the spring and summer only to wilt during this corrective phase, notable examples being CUSIF and CALVF, power up to new highs.
The terminal part of the wave C downtrend in gold and gold stocks over the coming weeks will probably coincide with continued strength in the general stockmarket, especially in the oversold Tech and Internet sectors. The next major upleg in gold and gold shares will quite likely start as the great bear market rally in general stocks peters out, probably around Dow 9000. I am only too well aware of the line in the sand drawn by "The Masters of the System" for gold, a thick line whose upper boundary is $340, and I can't envisage what event or set of events will cause gold to power through it, but this chart is saying to me that the next major gold upleg will do just that.
Gold spot $317 approx. on Monday 4 November 2002
Clive Maund
email: Clive.Maund@t-online.de
Kaufbeuren, Germany, 4 November 2002
Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets.
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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