What Fibonacci Levels Tell Us About What’s Coming Next

11/04/2010 12:01 am EST


In recent MoneyShow.com articles, I have expounded on the virtues of Elliott Wave theory, which I use as my linchpin for my short- and long-term views. To wit, back in August 2009, I made it clear that we would enter a five-year period of a massive move up in both gold and gold stocks. Gold was $900 an ounce at the time, and is now at $1360 an ounce. I made that forecast based on human behavioral patterns that go back centuries. Crowds love to all act like a swarm of bees flying together. Everyone hates stocks or sectors when they are down, and the crowd loves them when they are up or going up. Investors like to chase stocks and sectors when they are up high and running near parabolic, but they don’t like to buy large dips or consolidations ahead of moves. Once you learn that Elliott Wave patterns and a few other indicators sprinkled in can give you a heads up on when the crowd is about to jump in, you can basically front run the crowds.

The reason I knew in August of 2009 that from $900 gold, we would soon enter a “massive” five-year bull run is due to crowd patterns. To refresh, I see gold as being in a Fibonacci 13-year cycle up that started in 2001. The first five years, not too many investors participated in the bull run because the prior 20 did nothing. By the time everyone realized in 2006 that gold mutual funds had compounded 30% a year for five years, it was too late to jump in. Of course, that is when everyone started buying gold mutual funds and stocks. The problem is that the first move was over, and we had three Fibonacci years of chop with no net gains. The crowd gave up around the summer of 2009, and that is when I forecasted a huge five-year move to come. So far, gold is up over 50% in 13 months and gold stocks are up well north of that. The junior stocks started expanding in volume and price months ago, and that should have been yet another wakeup call to investors.

Near term in gold, I’m looking for this current power Elliott Wave to land around $1485-$1492 before a strong correction, and the recent pivot at $1312 was yet another short-term bottom which will be followed by the last leg up since the $1155 lows this summer. Investors are now waking up and buying gold and gold stocks, and this is part of the recognition period during the last five years of the 13-year cycle when more and more participants get involved. This is why this gold bull is just warming up, and by the time it peaks out, it will be like 1999 in tech stocks. The demand overseas for gold and obviously in China is likely to continue for many years to come; don’t be fooled by the various wave dips in sentiment.
The S&P 500, on the other hand, is very similar since the March 2009 lows.

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The bears have continued to focus on jobs reports and other ephemeral data and not the big picture. My opinion is that the great bear cycle ended in March 2009 at 666 on the S&P 500, at least for a several-year cycle up. When we hit 666, it was an exact 61.8% Fibonacci retracement of the 1974 S&P 500 lows to the 2000 S&P 500 highs. It took about eight or nine years to correct that 26-year move, and the pattern fits with a Wave 2 pessimistic Elliott Wave bottom. That is why the move since 666 has been stunning; because nobody sees it coming.
The correction we had this summer I forecast back in mid-April, and the correction ended on July 1 at 1010 on the S&P 500. At the level of 1010, we had a 38% Fibonacci retracement of the March 2009 to April 2010 13- Fibonacci-month rally, and a 38% retracement of the 2007 highs to 2009 lows. Those types of patterns are not random, and in fact, are big clues to get long the market. The problem is those patterns are hidden among the noise of the markets, CNBC, and all of that useless data. Currently, we are in a third Elliott wave up, which began at the 1040 S&P 500 pivot, and my forecast since has been for 1205-1220 before a corrective fourth wave down. Before it’s all over, the S&P 500 may well test the 2007 highs on this new cycle up from March 2009.

By David Banister of MarketTrendForecast.com

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