Precious Points: So Far So Good
"B waves can extend considerably and even appear impulsive, and ... short term traders may very well try to continue their luck on the long side this week. We seem to have completed the minimum requirements for a 3-wave correction, but as shown in the chart, may need to see the wave subdivide further as drama in the currency and credit markets plays out." ~ Precious Points: Fool's Gold, May 10, 2008
Last update's daily chart in gold depicted the likely path of a B wave rally in gold that was realized quite accurately in the price action unfolding last week. The initial 3-wave move to just below $890 was followed by a brief correction to about $860 and culminated on Friday with a push above $900, quite in line with expectations.
We've made no secret of viewing the current bullishness as a "sucker's rally" until proven otherwise, and will continue to seek verification for this view, with an open mind towards changing our outlook if dictated by price action. With technical indicators turning positive on the daily chart, and with gold finally moving above the 5-week sma, all signs would seem to suggest a return to the bull run in precious metals. But such was also the case in mid-April, when gold last peaked in a b wave before cascading to new lows in a five-wave decline.
At Friday's closing levels, the minimum requirements for the 5-wave c of B appear to have been satisfied, but some room higher is allowable as fifth waves are liable to subdivide and extend. As you can see above, the first target for the current advance has been met, but could easily extend to the 5-week sma, at about $920. Strong resistance also exists at $955 and, in fairness to those concerned the correction in gold ended earlier this month with the dip below $850, a move in gold above $940 could signal a flat where the C wave decline will fail to put in significant new lows and might even find support at a somewhat higher low. As counted above, gold could even approach new highs without technically precluding at least a test of the $850 low. Crucial to interpreting the advance, should it extend in that fashion, will be an analysis of the wave structure which, as it currently stands, appears to be a textbook 3-wave correction.
A lot seems to be staked on the expectations for a second half improvement in the U.S. economy, but low long term interest rates suggest a bond market that is still more worried of deflation than inflation. The most likely catalyst to create further strength in gold will be acute movement lower in the dollar, mirrored in another run to new highs in the euro against the dollar. With the Fed unable to raise interest rates and the ECB even less likely to cut rates in the face of improved economic data last week, dollar strength seems technical and artificial, rather than based on strong fundamentals. Rumors that the recent G7 meeting succeeded in slowing the transfer of foreign dollar reserves into euros seem to corroborate this version of events, but with such powerful forces behind it, the trend in dollar strength may yet last just long enough to provide the best gold buying opportunity in months.
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