Bearish Pattern in Gold Few Are Seeing

06/13/2011 11:38 am EST

Focus: COMMODITIES

Elliott Wave shows that the final wave of a fifth-wave top may be forming for gold, and traders need to be prepared for a sudden multi-month correction that would certainly catch the markets off guard.

I’ve been a gold bull since November 2001 based on Elliott Wave patterns and currency concerns as well. Since that period nearly ten years ago, I have followed and forecasted the patterns in gold and have been amazed at the clearly definable trends both for large moves to the upside, as well as corrective patterns.

Most recently, we had the last pivot bottom in January in the $1310 area, which I labeled as a “wave four bottom” with regards to the most recent five-wave pattern to the upside. In the longer-term view, gold has been in a long uptrend since the October 2008 crash lows of $681 an ounce, and I have it now in the final fifth wave up in a larger-degree, five-wave move since that time. Nearly 32 months of general uptrend with the occasional corrective pattern to the downside to kick the bulls off.

The issue now, though, is that fifth waves in a final fifth-wave pattern are very difficult to predict and they can extend and run higher than usual, or they can “truncate,” which means they are shortened much more than usual.

In the near term, investors want to see gold break out over $1551 in order to avoid what looks like a potential “truncated” top at that level. What happens is the bulls run out of gas, and the final fifth wave up gets tired and stops short of the normal destination, catching both bulls and bears off guard at the same time.

Below is a graphic of what this would look like in the current gold bull market with the recent top at $1577 as wave three, and the $1551 area as a truncated wave-five top:

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I’ve been telling all of my trader friends about this in order to make sure they are “prepared like a boy scout” for a possible large correction.

The other view I have had for a while is that we would surpass the $1577 highs and run up to a minimum of $1627 for the top of this fifth wave, with potential to run another $40-$70 higher in a throw over top pattern.

The bottom line though is you need to be prepared for a coming top in gold, which will be followed by a multi-month correction that most will not see coming. As it stands now, I can’t find too many bears on gold anywhere on the planet…and that is typical of five-wave tops.

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Click to Enlarge

By David Banister of MarketTrendForecast.com

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