Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Don’t Let Last Week’s Gold Fool You
05/09/2011 11:51 am EST
Toby Connor of GoldScents believes the less-than-parabolic move in gold will be followed by an equally less dramatic move downward, setting the stage for a big move in the next cycle.
Even with last week’s move in all commodities, I think gold likely has one more move to new highs before the D-wave begins (see the chart below).
However, the action in the dollar and silver last week has probably taken the parabolic phase of this C-wave off the table. Rather than the normal sharp spike up, it appears that this C-wave is going to end with a more modest move than prior C-waves.
That being said, it did last much longer and gain just as much above the prior C-wave top as any other C-wave. So, in terms of duration and magnitude, this C-wave has fulfilled every expectation.
I've noted in the past that a D-wave is a regression to the mean, profit-taking event. That regression tends to be most severe when the C-wave ends with a parabolic move―action and reaction.
However, this time it appears there will likely be no parabolic rally to top the C-wave. In that case, the D-wave will probably be milder than prior D-waves. As a point of reference, every D-wave so far has retraced at least 62% of the prior C-wave advance.
Without the parabolic stretch, I think it's likely that the impending D-wave will only retrace roughly 50% of this C-wave. If gold pushes up to a marginal new high slightly above $1,600, then it will probably only drop to around $1,250, which just happens to mark the upper boundary of last summer's consolidation zone.
What should follow after that is a fairly strong A-wave surge. A-waves usually test new highs, but don't break them. At that point, gold will enter a long sideways period to consolidate the massive gains made during this last C-wave. During this period, it will get very tough to make money in the precious metals market.
However, there is still some upside potential once gold puts in the daily cycle low that is trying to form now. There is great potential during the D-wave if you know how to use puts, and excellent upside potential during the A-wave next fall and before the metals sink into the consolidation doldrums.
This year still has great opportunities left, and of course, we still have the next C-wave to look forward to in 2013. That one should make this C-wave look puny in comparison.
By Toby Connor
Related Articles on STRATEGIES
I spend a lot of time talking about block trades. These are the huge trades that show up on your opt...
I have been tracking a set-up for the SPDR Gold Trust ETF (GLD), which I analyze as a proxy for the ...
AllianzGI Equity & Convertible Income Fund (NIE), which yields 6.8%, invests in convertible equi...