Gold: Part 2: Has the gold "correction" ended?
Cliff Droke
Last week we discussed the question, "Has the correction in the gold market ended, or is there still more to go before the bottom is reached?" We examined the major support and resistance levels in the April gold chart and concluded that resistance would likely be encountered at $360, where a "price equilibrium" level exists. This proved to be a valid point as gold futures met resistance at precisely the $360 level last week before declining back down to test the recent lows near $344-$345.
Has this done anything to upset the major support and equilibrium areas discussed last week? In short, no.
Last week's commentary featured the parabolic bowl in the gold daily chart (above) that had not reached bottom yet, and the parameters of this bowl show the "vertex," or mid-point, at $340. The $340 level is the *price* bottom of the bowl in April gold futures. The bottom in *time* was reached late last week and will be passed during Monday's (March 3) trading session. If gold stays above $344-$345 in the next 2-3 days it will bring gold out of the immediate danger zone and by later in the week gold will be nearing the upward-curving rim of the bowl. Based on my count the 40-week cycle in gold bottoms later this month and having gold find its bottom somewhere within this parabolic bowl would be a big positive as it would set up a nice rally once the cycle has fully bottomed.
Another technical factor worth pointing out is that a textbook parallel channel has also developed in the gold daily chart (see above). This coincides nicely with the parabolic bowl discussed above. The lower boundary of the channel was obviously tested with success in February and looks solid heading into March.
In Elliott Wave terms a case could be made that gold's latest correction is "Wave 4" of a 5-wave impulsive advance. This would certainly account for the sharp, nearly straight-down nature of the pullback from $385 down to the present $350. If in fact this is Wave 4, the proof will be as follows: either gold will manage to stay above the 3-month uptrend line (which currently intersects the $350 area, or the uptrend line will be slightly penetrated down to no lower than $340. How can this be? Because "Wave 4" pullbacks often penetrate by a slight margin the prevailing uptrend lines, albeit briefly. This has the effect of shaking out the weak-handed longs and "corrects" the investor exuberance that had built up from the previous advance. So whether we're talking in terms of Elliott Wave Theory or in terms of Parabolic Analysis, there looks to be strong support for gold above $340 heading into March.
Speaking of waves, it's very instructive to notice that gold's overall wave structure has been relatively smooth and coherent in the last four months compared to previous times when cross-currents and a "herky-jerky" price line prevailed. A smoothing price line during advances accompanied by easily discernable Elliott Wave patterns is the sign of a developing long-wave bull market and should be of great comfort to the many gold investors who have recently been asking the question, "Has gold topped out for the long-term once again?" The message of the market is an emphatic "no!" Waves of price movement can be likened to the waves of the ocean - " the more "linear" the waves are as they approach the shore, the better the surfing. Waves that come in from all directions indicate cross-currents and possibly other dangers in the water. But a nice, rhythmic wave structure with waves coming in perfectly horizontal to the shore mean the currents and wave cycles are in alignment. This same observation can be made with the current gold market - a "surfer's" (i.e., trader's) delight if ever there was one!
March 5, 2003
Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com
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