Tuesday, August 12, 2008

Elliott Wave Count on Gold - VI

In the previous update last month I wrote -


. . . . . . 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 . . . .

Gold prices have fallen as expected. Bullish market participants have been hit hard and gold decline surprised everyone. I was surprised by the intensity of the fall from $870 to $802 in the international spot markets. $850 had been a very strong strong support and all traders who trade logically or otherwise would have kept their stops at that level which got triggered. Being short in gold from very comfortable level did serve well. looking at the current price levels, $800 and $790 looks important pivot levels which would lead to further buildup of positions in the gold markets. I feel a material damage has already been done to the market as we enter the 'official bear market' in gold.

It is worth mentioning here the August plunge in gold happened in 2007 as well and was quickly bought into. Gold bugs are again expecting the same result this year and any rebound in gold will see some bugs come back into the market. This would result in sharp pull back. We must keep an eye on any reversal pattern on charts which may signal a pull back as prices remain highly oversold. The part of gold fall can be attributed to a rise in USD but it is important to note that gold peaked nearly 3 months before USD turned the tide. This means the fall is not entirely due to the USD.

Looking at the Elliott wave structure we see market nearing an important bear channel support. Take a look

It is not wise to catch a falling knife. We should not buy weakness even at this level unless we see a strong reversal pattern. But strength has to be sold into. Seasonally gold is approaching a strong season. Physical buying in India and other nations will gain strength in September. Gold ETF volumes have fallen sharply in the last one week. There has been some buying in India spot markets but it has been too low and too late. The investment demand for Gold has suffered badly due to low liquidity and its role as a safe haven has been deeply undermined. I say this because in the time of current financial market turmoil and highest inflation levels in nearly last quarter of a century gold has not done too great. Euro has now gone out of favour as investors realize that Euro Area is no better than the US. Euro has fallen gap down and I feel this gap is a material one. Though we may see a rebound in Euro and Gold material damage has been done. Gold overall looks quite oversold and selling may not yield great results from current level of $814.

Its been quite some time since I wrote the price projections of crude oil. Following the count I note that the structure looks weak and bearish. In the very short term $109 may act as a very strong support and may result in a short term counter trend rally.

In the very near term i.e. the current week we may have already seen the lows in gold and crude. Unless we take out the lows there is high probability of a counter trend rally which will be sold into. We wait for prices to resolve and give fresh trading setups.

Sahil Kapoor
Comments are welcome.

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