GOLD PAST PRESENT & FUTURE Technical overview
Let’s look at the history of gold where it has started from and how it has been performing in terms of technical levels. If we look from the past dated March 1993 where it was trading in the range of 330 $ per ounce and from the same have tested the higher level of 410 $ per ounce on the higher side in Feb1996 with the narrowing in the range of 340 $ to 410 $. From 2006 starting when we have seen some down side move in gold from 410 $ have moved to test 250 $ support on lower side in the year of 1999 September, after testing this level in 1999 ending and again in starting of 2001 have moved side way to upside moving towards the higher level of 410 $. It has formed a Cup and Handle formation as shown in the following figure.
As per the cup and handle pattern break out which leads to the 2- 3 % immediate rallies and after retrace back to the break out level and after testing the same will actually move to the target set by the break out pattern. If sustain trading is seen below the break out point for any reason the pattern becomes invalid. After the break out of the cup on the higher side have formed a handle formation in a way of Flag patter or pennant that slopes down side and the pattern break out confirm the uptrend. In the above chart too we have seen a short side way to down side move after the pattern break out and formed a Flag pattern, where the break out of the bull flag patter confirm the uptrend in market. Over here we have seen a good follow up in the pattern and the target also met as set by the break out given in mid year of 2005.
The difference of the cup which was from the high of 415 $ to the bottom support of 250 $, comes to 165 points when added from the break out point of 415 where the target is set around 580 $ but after taking some short resistance at the same have continue the bull run without the major correction have tested the level of 730 $ which is twice the difference of the height of the cup from the break out point.
From the above chart it has been clearly seen that the break out was seen with the Cup and Handle formation and the fresh rally in Gold History was started in the bull run and have been moving on higher side since then. With the break out it has also started the wave formation, well know as Elliot Wave Theory which we will study in detail.
Elliot Wave Theory and Gold
Basic Definition
In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns or waves that recur in the markets. Very simply, in the direction of the trend, expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in short-term charts. The whole theory of Elliott Wave can be classified into two parts: Impulse patterns & Corrective patterns.
The impulse pattern consists of five waves. The five waves can be in either direction, up or down. Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it back during the corrective phase.
Now lets come to the Gold and its performance after the break out of the cup and handle formation as explained above and the enter of the wave theory. The break out was seen at 415 $ and have rallied upside where it tested twice the target set by the pattern break out and have been in the rally which can be said to be the wave I. Wave I started from the lower level of 415 $ and have moved to test the higher level of 730 $ where the rise was around 315 points and this rise can be taken as the base for the further calculation of the further trend in future. After the rise it entered in wave II the corrective wave and have tested lower level of 558 $ which was almost 50 % retracement level of the wave I and on closing basis was just sustaining above the same but have tested the level of 540 which was almost 38.3 % retracement of the wave I but closing basis was still above the 50 % retracement, indicating a good reversal from the same towards higher level. After the break out above the 690 $ level where it has taken multiple resistance have moved further upside confirming the wave III continuation. The initial stages of the Wave III rally are slow, and it finally makes it to the top of the previous rally (the top of Wave I). Traders are not convinced of the upward trend and are using this rally to add more shorts. For their analysis to be correct, the market should not take the top of the previous rally. Over here we have seen multiple resistance of 700 $ level and as this level was broken there was sharp rise in market where most of the stop was hit and have sharp rise was seen and break out above the previous top indicated the rise in the form of wave III.
Wave III is expected to move in the Fibonacci Ratio which is the calculated on the basis of the wave I, if we look the rise have been exactly to the ratio of 150 % of the wave I from the
lower level of point II at 558 $. The difference of the wave I which is 315 points and if we calculate 150 % of the same which comes to 473 points and by adding the same from the bottom of wave II at 558 $ brings the level of 1031 on higher side. From the lower chart if we look wave III have rose till 1033 $ just above the 150 % level of 1031 $. As per the Fibonacci
ratio of 161.8 % which comes to 1068 $ fails to test and have entered in the wave IV which was again a corrective pattern.
Wave IV started after confirming the top of the wave III at 1033 $ which was 150 % of wave I have been on the down side move and also in its corrective wave pattern of five wave have tested the level of 724 $ on lower side. The correction was sharp and have seen a selling on every rise in the same wave where have seen some buying at certain dip but fails to carry on the rise for uptrend and have moved to test the lower level of 724 $ on lower side. Corrective pattern of the wave IV have been exactly 50 % of the wave I and wave III in combination. If we calculate the rise from the bottom of the wave I of 415 to the top of wave III which is at 1033 $ which comes to 618 points, taking the 50 % retracement of the rise which comes to 309 points and deducting the same from the higher level of 1033 which reaches 724 $ where the gold have tested the exact support on lower side. Reversal was seen from the lower level and entered in the wave V in the impulsive wave which is in uptrend.
Wave IV which competed at 724 $ on lower side have moved upside and have been trading in the impulsive wave where the resistance was seen at the higher level of wave III. The rise from the lower level was in the form of wave i and have given a short correction in the form of down trend formed ii wave have moved upside and have given a break out where the wave iii was seen in action. Lets study the wave V in detail with following chart and predict the near term future performance.
Let us divide the wave V in to two parts, where the starting of the wave is known as internal wave and within the same what the wave formation is formed can be termed as minor wave. Internal wave are denoted as only number by i – ii and so on where as the minor wave are termed in bracket (i) - (ii) and so on.
Let’s study the internal wave of the V wave which has been in the minor wave within the internal wave. Currently its in the minor wave (iv) as a corrective pattern of the internal
wave iii and also in the wave iii have been in the internal wave of wave (iv) which is in corrective form, lets look in the detail with the calculation with the following chart.
From the above chart we have seen wave IV have completed at 724 $ and have been in the wave V. Internal wave in the V wave which started have moved from 724 $ and have tested the level of 1005 $ on higher side. After testing the level of 1005 $ which was at the resistance of the previous top of 1033 $ have been in the side way direction. Wave i is the base for the next wave calculation, where the difference of the wave i is 281 points. After testing the top of 1005 $ which have corrected and tested the lower level of 865 $ have been retraced exactly by 50 %. After testing the same level have seen a bounce back in the iii wave where the calculation of the iii wave can be expected to be raise by 161.8 % of the wave i to the higher level. Calculation of the iii wave of the difference of 281 with the 161.8 % comes to 455 points and adding the same from the completion of the wave ii of 865 $ getting the target of 1320 $ on higher side. Recently it has made a top of 1226 in inter week high and on closing basis have given a close at 1180 $ after which have been in the corrective mode. Wave iii is yet not completed and is in the (iv) minor wave in the iii wave. Minor wave (i) started from the lower level of 865 $ and have tested the high of 980 $ where the difference is 115 points and have corrected till 905 $ in the form of (ii) minor wave which is 61.8 % retracement of the wave (i) on lower side. Calculation of the wave (iii) is expected to be the rise by 161.8 % of the difference of wave (i) which is 115 points, comes to 186 points and adding the same from the lower level of minor wave (ii) at 905
$ where the target comes at 1091 $. Looking at the chart on the weekly basis gold have tested higher level above 1091 $ and tested 1126 $ but on closing basis the closing was seen near to 1091 which was target set by the 161.6 % retracement of wave (i) from the point (ii) level.
Currently it’s in the corrective wave of the minor wave of wave forming (iv) wave where it may retrace by either 50 % of the minor wave (iiii) or may retrace to 38.2 % of the minor wave (iii). If we look at the retracement by 38.2 % then may test 1020 $ on lower side before entering in the minor wave (v) or if the selling pressure continue will retrace by 50 % of
the minor wave (iii) may test 998 $ on lower side, but not expect to trade below 980 $ which is the top of minor wave (i).
If the retracement comes to 1020 on lower side in the form of minor wave (iv) then will enter in the wave (v) where we can expect the target of 1286 to 1320 on higher side let us look how we come to this above target. In the minor wave the difference of the wave (i) is 115 points and if we expect wave (v) to be 261.8 % of the minor wave (i) where it comes to 301 points and adding the same from the lower level of expected 1020 level can test 1321 $ on higher side. To support the target set by minor wave with the inter wave iii target which can be either 150 % rise of the wave i or may be 161.8 % of the wave i on higher side. Calculate the difference of the inter wave i is 1005 on higher side to lower level of 724 $ coming to 281 points. Calculation of 150 % of the same comes to 421.5 and in respect to 161.8 % comes to 454 points. If we add both the figure from the bottom of the minor wave ii at 865 the higher side target comes to 1285 $ with the 150 % retracement and 1320 $ with the 161.8 % retracement.
To be precise with the inter wave iii the near term target is expected to test 1320 $ on higher side with 161.8 % retracement in inter wave calculation and similar with the minor wave (v) calculation with 261.8 % retracement comes to 1321 $.
From the above explanation it was clear that minor wave (v) is expected to test 1320 $ on higher side and after the 100e will come in the corrective minor wave (a) – (b) – (c) which can be tested as shown in the graph where minor wave (a) can test 1155 $, (b) can test 1200 and (c) will move to test 1080 level which will also complete the inter wave iv at 1080 level max this inter wave may test 1040 $ before the reversal in market and may enter in the inter wave v of the V th wave of the larger cycle. If we calculate the target of the internal wave v which can be expected to test 261.8 % of the difference of wave i which is 281 points and the calculation comes to 735 points and adding the same from the lower level of 1080 $ will move to test 1800 $. This level if tested will also complete the largest wave V completion and after that will enter in the corrective wave in the form of A – B – C. Corrective pattern from the higher level we expected at 1800 $ can either be 38 % of 50 % of the entire rally, calculating the same will bring to 1300 $ in the form of A- B – C. Target of 1800 will be tested in the third Quarter of 2010 and by the year end may enter in the corrective form.
Conclusion: We expect some minor correction in market till the lower level of 1020 $ to 998 $ on lower side but not expect to trade below 980 $ and we expect market to move on higher level to test 1320 $ on higher side where the inter wave iii will get complete and after again a short correction in the form of wave iv will move to test 1800 $ to 2000 $ and above in near term. After testing the higher level of 1800 $ will be in the corrective wave to test 1300 $.
Report by: - Rajeev R Darji; (Sr. Research Analyst); Commodity & Currency
Email: - rajeevrdarji@yahoo.com
Contact No: +91-22-42308024, Ext: 240 Cell no: 9820987859
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