Tuesday, September 09, 2008

Elliott Wave Count on Gold - VII

. . . . . . . . . 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 . . . . . . . .


Gold prices have been glued to $790 to $820 range for the last one week. Price action has been very volatile and there is huge participation from bears and bulls at pivot levels. Indian spot markets have witnessed huge demand from jewelers and rural demand due to a good monsoon has been on the higher end. Gold prices have not fallen for the past two weeks in absolute terms. Although the financial press have been writing the significance of a fall in USD supporting gold bears but there has been no absolute change in gold price. USD as measured by the dollar index has risen from a meager 73 to 78 and there is little fall in gold prices. Gold market does not follow USD in lock step but it is largely the sentiment which drives it.

In the long term, Euro is expected to test 1.25 against the USD. It sounds quite outlandish but the charts are looking very weak and USD uptrend is gaining strength. In the very short term, like in the next two to three weeks, euro may rise to 1.46 or till 1.48 as it is heavily oversold.

Let’s look at the price pattern in gold closely

Price pattern are getting into a trend defining range of $790 to $840. I feel a more realistic range in $865 to $790. This range would be a trend defining range for the rest of the year. If prices are able to rebound from this level and move up, there would be an upside to $865 and beyond but this upside would be corrective in nature. The medium term trend has turned down and as I wrote previously the next realistic target is now at $716.

Trading is nothing but weighing the probabilities and being on the most probable side of the price action. As of now gold prices are giving little cues. The best trading setup which is visible right now is to trade a break below $790 or wait for a selling level of $840 to $865. Buying is fraught with risk, but a sharp rebound will make people get up and notice the momentum.

The short term count on the Elliott wave analysis shows a downward five wave pattern which would mark the end of current bearishness and the end of the long term corrective fourth wave. At present we are beginning wave 5 of the downward 'C' wave of the major 4th wave. The above graph shows the possibility of prices plunging to $716 in the next 6 weeks or so. An alternate count will create a scenario for prices to rise to $865 if gold is unable to trade below $790.

Long term Elliott wave count is resolving towards $734 which marks the 38.2% of the primary upmove. Gold market is in a secular bull trend and the current medium term bearish price moves will get exhausted at this level. Price have already fallen below the four year trendline support and another fall below $790 will make $734 a certainty in the international spot markets.

There are three scenario to trade as of now. First is to trade a break below $790. Second is to sell in a range of $820 keeping $827 as a risk level and last to wait for $840 - $865 to sell.

September is the month when USD rebounds and forms reversal and we might have already formed one. Euro may rebound to 1.46 and we should be sellers at that level targeting 1.34. Interesting price action is coming up in precious metals but energy might disappoint trend following traders for a while.

Sahil kapoor
Comments are welcome

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