Elliott Wave Counts Point to Specific Level for Gold

02/03/2011 1:01 am EST

Focus: COMMODITIES

My recent forecasts for gold were short-term bearish from the $1390 area as we saw a clear triple-top breakdown from the $1425-$1430 range about eight weeks ago. However, the drop to $1310 fulfills a potential Fibonacci pivot low according to my Elliott Wave counts on gold, and if I’m right, traders can begin building long positions with the following views in mind.

The rally up from the February 2010 lows at $1044 has been a large wave three structure that is not yet complete. We have completed three of the required five waves for this structure, and the current correction is a fourth wave. This pattern looks like what I call or Elliott termed a “3-3-5” pattern. This means you see three waves down, three waves up, and then five waves down to complete the correction. Note the chart below, which I sent subscribers several days ago, forecasting a possible pivot at $1310.

chart
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Now, as you can see above, we did end up dropping back down from $1345 an ounce to $1310 last week and pivoted higher. This confirms a possible fourth wave bottom after a seven- or eight-week correction period. This type of movement works off the overbought sentiment levels of traders. In addition, we had the exchanges increasing position limits in the New Year and that caused some additional liquidation selling.

The long-term views now are for $1287 to hold as a worst-case bottom in this fourth wave, and for the fifth wave to begin (if it has not already) to over $1500 per ounce at the next interim highs. I expect this could take quite a few months before we can even consider attacking the $1430 area, but in time we should climb back above that wall. See my updated long-term Elliott Wave-based chart below. The general advice for traders is to take a long position with a stop at $1285, but add to your position on any tests of $1310 and down to $1287.

chart
Click to Enlarge

Gold is in a 13-Fibonacci-year bull market. This is much like the tech stock bull market from 1986-1999, in fact, and this would be similar to 1997 in the tech bull—still a lot of room on the upside to come for both gold and gold stocks at this point. The Fibonacci eight-year period ended around $905 last August, which is when I forecasted a huge, five-year bull run in gold and gold stocks to commence. Don’t fall off the wagon on the shakeouts!

By David Banister of TheMarketTrendForecast.com

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