Tuesday, June 03, 2008

Metals Market Perspective

Gold markets have given up large amount of gains in the recent weeks and still look weak. The USD index looks set to form a significant bottom, may be an important annual bottom in weeks to come. The US Federal Reserve and the ECB are trying all tricks up their sleeves to strengthen their respective currencies. It looks both the countries want a stronger currency to tame inflationary expectations. The Federal Reserve has already sown the seeds of economic recovery by reducing the Fed Funds rate but it might take more time for the 'Main Street' to catch up the pace it usually does after Fed reduces the cost of money.

The huge liquidity that has been created to save the 'intelligent' investment banks would have catastrophic effect on financial markets in years to come. One thing is for sure, the abnormal returns on equity portfolio would dry up for years. This is true for the emerging markets and the developed countries alike. However as and when the credit crunch abates there would be a flood of liquidity which would create bubbles across the asset classes. One such bubble would be in the emerging market equities.

Coming back to present, the current situation in the commodities markets is quite unprecedented. Crude oil and Gold are trading at extreme value to each other, copper has nearly separated itself from other industrial metals and grains are consolidating.

Currently there seems little evidence of another super rise is precious metals in the next 3 months or so. The wave structure looks weak in case of gold as we enter the most brutal 'C' wave of the double zig-zag correction. Looks like gold is going down to $806 or lower before the next quarter ends. The important point to note is the correcting fractals of the corrective wave in gold. The upmove to $1034 from $860 took lesser time than the current corrective pattern. This means the major uptrend is still very much intact. Gold generally consolidates for lengthy time periods before moving higher and that too in between the 200DMA and 50 DMA. So we are going down in Gold in next few weeks if we break $864 in the spot markets even on a 240 minutes closing basis. A head and shoulders pattern will cap upside in Gold as levels of $880 will be crucial resistance for markets to overcome. This is the potential risk zone with targets at $823 and $806 making it a good risk reward trade on yesterdays market closing.

Its time to watch out for Crude oil in the next week as it moves in a range of $131 to $138. Break above or below would decide the short term momentum. We look forward to crude oil touching $144 next week on a close above $138 on 240 minutes bars and $149 looks probable but it has too many people betting money on it. It has been seen so many times that when markets start deciding the amount of time and price move in 'When and by how much' rather then in which direction, its the time to cut your positions and wait for the reversal. I feel anything above $120 is an extension on our count and will probably end in tears. Still we are in just the third wave, fourth wave will be punishing and would probably be a zig-zag from $144 or $150. Its always better to trade the pattern then the wave.

I will post the graphs of my elliot wave count in the next few days.

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