Gold Heading to $2,350 Per Ounce
Look for a multi-week or multi-month consolidation pattern before gold moves higher.
A Triangle Pattern serves to let the "economics of the security" catch up with the prior large movement upward in price. In essence, the crowd behavior pushed the price of gold a bit too high too fast, and this consolidation pattern lets the fundamentals catch up to price action. We had a parabolic move which I discussed many weeks ago, and those always end badly to the downside. The $208 drop in three days is a typical reaction to a spike run like that. At the end of the day though, I had been forecasting what I call a Wave 3 top and was looking for a multi-week or multi-month consolidation pattern before gold could move higher.
Let's examine what that triangle projection may look like. They take the form of five waves, or what we can call ABCDE in a pattern. The biggest drop is always the A Wave, and that was 1910 to 1702 in three days or less. The next biggest drop is the C Wave, and that was 1920 to 1793, noting it was a Fibonacci 61.8% drop relative to the A Wave. In other words, each successive wave down in the five-wave triangle is smaller. This is due to the sentiment finally shifting and the trading patterns moving from people chasing the hot sector or stock or metal, to the long-term investors accumulating the dips.
If we end up consolidating in a triangle, then gold should end up looking something like the below pattern I drew, with a target of $2,350 per ounce many months out:
The other pattern my firm is watching for is the ABC Correction Pattern. We had the A Wave down to 1702, which corrected 50% of the move from 1480-1910 in three days. Rarely do you get a major move down like that and not get some type of "re-test" of that low, but because the fundamentals for gold are strong and getting stronger, we are favoring the Triangle Pattern still as most likely. With that said, there is a fat and juicy "gap" sitting in the chart around 1660 on gold and dropping down there is what a lot of traders are watching. If that were to fulfill, then we will see an ABC correction ending around $1643, and then gold will begin another multi-month rally to new highs:
Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.
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