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Elliott Wave Trading

Gold Price Intermediate Top

Commodities / Gold and Silver 2016 Mar 21, 2016 - 01:52 PM GMT

By: Clive_Maund

Commodities

All the technical evidence suggests that gold is building out an intermediate top area here, which fits with the fundamental situation where complacency and "risk on" are making a comeback, thanks to the boundless generosity of Central Bankers.

Starting with gold's 6-month chart we see that after its parabolic ramp up in January and early February, it has been struggling to make further progress. The supposed (by some) bull Flag or Pennant turned out to be false and although it has edged ahead a little, the passage of time has resulted in its breaking down from the parabola simply by moving sideways, which has, unknown to many, opened up the risk of a potentially severe drop. The most plausible interpretation of pattern development since the parabolic blowoff spike in early - mid February is that it is a bearish Rising Wedge, which the price broke down from about a week ago, before a backtest of the breakdown point with the big up day last Wednesday when the Fed didn't raise rates, which triggered panic short covering.


The pattern may also be classified as an upsloping Head-and-Shoulders top, but to avoid clutter we haven't marked this on the chart. One interpretation that is doing the rounds is that this pattern is the "Handle" of a "Cup and Handle" base, with the parabola being the "Cup", but this is considered invalid, because the Handle should be downsloping with volume declining, instead of which it is upsloping with continuing heavy volume which is viewed as bearish.

Gold 6-Month Chart

The chief reason for showing the 1-year chart for gold below is so that you can compare it with the latest COT chart shown directly below it, which also goes back a year, but this chart does also reveal that gold's advance ran into trouble when it slammed into the trendline target shown.

Gold 1-Year Chart

Gokd COT

Gold's latest COT shows that Commercial short and Large Spec long positions are still at a very high level, which is bearish. There was a slight drop last week but we should not be fooled by this - these figures were taken for last Tuesday's close, when gold had been dropping for 3 days and before it blasted higher on the Fed on Wednesday, so it reasonable to presume that the real readings are back up near or even above the highs. These readings strongly suggest that a sizeable drop is looming.

The latest gold hedgers chart, a form of COT chart, is bearish...

Gold Hedgers Position
Chart courtesy of www.sentimentrader.com

The 6-year chart for gold makes plain that, while gold's rally from the start of the year has certainly been impressive, it is does not necessarily mark the start of a new bullmarket - it might do, but first it will have to break clear out of the major downtrend shown on this chart, which is has yet to do. Right now it is at a perilous juncture perched at the upper boundary of the major downtrend after a steep rise, with two important factors suggesting that it is likely to get beaten down again, one being the highly unfavorable COT structure that we have just looked at, and the other being the fact that the slow stochastic is rolling over at a high cyclical peak - look what followed after the previous occasions that this happened. Fundamentally there are two negative factors coming into play too - the return of a "risk on" mentality where investors are more interested in the broad stockmarket than in gold and the prospect of the dollar rallying again after hitting a downside target.

Gold 6-Year Chart

The gold Optix, or Optimism chart, is in middling ground and doesn't give much indication one way or the other...

Gold Optix
Chart courtesy of www.sentimentrader.com

Finally the Gold Miners Bullish Percent Index is at levels normally indicative of a top. By far the majority of investors are bullish on the sector now, which is obviously a sentiment extreme carrying much more downside risk than upside potential.

Gold Miners Bullish Percent

Now we will look at the latest charts for the dollar index. On its 6-month chart we can see that it dropped to arrive at a trendline target on Thursday, following the Fed saying it wasn't going to raise rates. With the bad news out, and the dollar having arrived at a target not far above strong support in an oversold state, there is a good chance that it will turn higher here - and that the entire commodity complex, which has had a good run on dollar weakness, will now turn lower.

US Dollar Index 6-Month Chart

There are other factors besides whether the Fed decides to raise rates or not that will determine the dollar's trend going forward, with positive factors being safe haven movement into the dollar, and a possible continuation of the carry trade unwind, so it is dangerous to assume that it is "done for" just because the Fed didn't raise rates. Whilst a break below the key support in the 93 area shown on the 2-year dollar index chart shown below would obviously be bearish, and strongly bullish for gold and silver and doubtless other commodities, the latest COTs for the dollar and especially copper, gold and silver suggest that this is not going to happen, and that instead the dollar will turn up from here, which it is certainly well placed to do.

US Dollar Index 2-Year Chart

The conclusion therefore is that the dollar is going to turn up here, or very soon, and that commodities are going to get smacked back down again, especially copper, gold and silver, and oil. Gold in particular is very vulnerable after it recent frothiness and wild excitement among goldbugs.

By Clive Maund
CliveMaund.com

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© 2016 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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