How I Analyze Gold Charts for Profit

09/09/2011 9:00 am EST

Focus: COMMODITIES

The gold bull should continue to run for a couple more years, but Fibonacci analysis shows we could be in for a bit of a wait to Gold 2000.

A few weeks ago, I penned a public article for a few private traders calling for a major correction in gold being due. Just 72 hours after my forecast, gold had dropped a stunning $208 per ounce in three days, catching most by surprise.

Why did I forecast a top in gold then? Why did gold rally back to new highs recently? Is the gold bull market now over? Let’s see if I can answer those questions with some level of logic below.

I forecasted a major correction because gold has had a run of 34 Fibonacci months from October 2008 to August 2011—from $681 to $1,910 per ounce spot price in US dollars. That type of pattern was formed with a clear 5-wave move, with obvious corrections along the way.

The reason I was confident of a major correction was due to the confluences of the 34 months of time, the price relations to prior rallies and corrections, and the Fibonacci sequences, coupled with the sentiment and cover stories on gold in major publications. Gold should have entered into a multi-month correction that will consolidate that 34-month move, and the first shot across the bow was the $208 drop in three days.

Interestingly, that $208 drop over three days corrected 50% of the eight-week move from $1,480 to $1,910. As we can see, markets move very, very fast these days, and can whipsaw even the best of traders. I told my subscribers to cover their short bets at $1,724 spot. Since then, we rallied to $1,920 this week before topping again.

The reason gold rallied back and touched the old highs and then some was due to the German Court's pending decision regarding the constitutionality of backing the Eurozone countries with bailout funds. We had a positive decision by the court, denying claims that the bailouts were unconstitutional. Had the court ruled the other way, we would have seen gold spike to $2,000, and the S&P 500 and European bourses tank hard.

So, if you were getting long gold on this recent rally, you were taking on a lot of short-term headline risk, and I told my subscribers it was best to stand aside until we got the ruling.

Now that the ruling has come out, gold has topped at $1,920 in what traders typically would call a “double top” pattern, but it’s more involved than that. In the work I do, we call it an “irregular correction “ pattern, where the retracement of the $208 decline runs all the way back up and past where the decline began at $1910. These are very rare patterns, and again, I believe exacerbated by the Eurozone issues as they hinged short-term on the German decision.

What we should see now is what I call a “C WAVE” to the downside, with targets typically at $1,620 relative to the rally from $681 to $1910 over 34 months. A drop of $290 is only 15% from the highs, and would fill in gaps in the gold chart.

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Will gold drop that low? The fundamentals for gold are screamingly bullish, but the entire world knows that and it may be priced in for a while.

Gold should consolidate those topping highs for a while to let the fundamentals catch up with the price action in gold, which ran ahead of them and then some. The gold bull market should run for 13 Fibonacci years, and I have been bullish since November 2001.

I understand the fundamentals are very strong for gold, so please don’t misread my comments or forecast. I use crowd behavior and psychology to help pinpoint major tops and bottoms, and right now we should have some more work to the downside to correct sentiment in gold, and then allow for the base-building period before the next leg up towards the highs in 2014.

David Banister can be found at MarketTrendForecast.com.

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