Wednesday, July 30, 2008

Elliott Wave Count on Gold - V

Gold prices have declined nearly $70 from the high of $977 which was expected to be a high. Since markets have come down below $910, it shows inherent weakness in the market. The Elliott wave structure called in for a significant decline in spite of bullish sentiment among all gold traders. Strength in USD supported the bearish sentiment in Gold prices.

In the last update I mentioned -

. . . . . . The 'C' wave has 5 wave downward impulse in the direction of the trend. We might have entered the 3rd wave of this downward 5 wave sequence within the 'C' wave. First support level from current price stands at $940 and then a pivot at $935. A daily close below $935 will take us to $910 which is the pivot point of this corrective wave . . . . . .

The Elliott wave count on Gold on a weekly graph suggests the current fall to be the strong 5 wave downward 'C' wave of the larger degree ABC correction.

$880 is the next expected level where prices would take a breather. Presently the prices are expected to face resistance at $918 to $922.

On a longer term basis Gold looks weak and a fall below $873 will make $850 highly probable. Looking at longer term graphs, Gold prices are expected to remain weak for an extended period now. Worst case scenario can take gold prices down to $716 on a break below $845.

If gold does decline below $850, will it signify that markets are expecting a softening of inflation?

In the longer term it does look like, markets have started factoring in a probability of lower inflation which means US Fed is going to clamp down on money supply with Euro zone economy staring a major slowdown. All this doesn't augur well for commodity prices. Still agricultural products continue to trade on multi year highs and may continue to do so in the near term due to basic demand and supply mismatch. Most of the emerging market central banks are now tightening and western central banks surely doesn't look far from having a hawkish bias.

Price patterns in Gold are again getting bearish. Last time there were atleast three Head and Shoulders pattern formed in gold at around $860 levels which it negated after breakdowns. Gold has formed one again with a $70 measured move at $917 on spot gold. We have a breakdown again and if this holds we might be in for a very strong down move. Risk level in Gold is now at $926 with a sell on rise to $910 to $920 approach. The graphs looks like this -

In the very short term, gold and crude oil look way too oversold and might give a rebound of sorts to sell into. So we should be adjusting our strategy to avoid sudden price shocks as volatility still remains the key in precious metals.

Market participant might also be interested in looking at the cup and handle pattern being formed in gold. This pattern if formed will take gold above a new all time high. The necessary condition for this to happen is that spot gold should not trade below $870. If it does, the odds of this pattern being relevant will be reduced to naught. Risk on this pattern is at levels of $873. So at $880 we should lighten up the positions and wait for prices to resolve.

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