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How to Capitalize on Gold's Popularity


Wait for a healthy pullback to get long or take a low-risk shot on the short side.

Summary of Yesterday's Notable Technical Developments

Stocks put in a mixed session; technology was an area of strength while energy-related issues were weak. The S&P is still struggling to hit new highs and re-take the broken uptrend line.

Bonds were hit again on Wednesday; technically, the yield on the 10-year T-Note closed above resistance at 3.311%.

Commodities traded modestly lower -- and still below $25 resistance on the DBC -- as crude oil weighed things down after a bearish inventory report mid-morning.

The US Dollar Index posted a gain Wednesday, but still has plenty of work to do to turn its chart truly bullish.

Critical Market Components:

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Market Internals (volume figures are rounded):

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Chart of the Day: Gold Futures (@GC)

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  • Recently, gold has caught fire and captured the attention of both institutional and individual investors around the world.

  • Goldman Sachs (GS) was actually out recently with a forecast of $2,000 gold -- to ThirdWave's knowledge it is the first "blue chip" research firm with such a call. We're reminded of their similarly bullish call on crude oil as it approached $150 last year -- shortly before it began its rapid descent to the low $40s.

  • Based on our work at ThirdWave, gold futures are in the latter stages of wave iii of 3 higher. We suggest the final stage of wave iii because of the proximity to the 261.80% Fibonacci projection level for wave iii ($1,238.43). With the way gold traded in the evening session (traded at 1,226.50 at 10:20 p.m. Wednesday night), we may see gold futures hit our target as early as today.

  • Once that target is hit, we anticipate a wave iv corrective move. We're not certain what to expect with that correction -- a flat, shallow correction or a sharp, zigzag correction. Based on the rule of alternation in Elliott Wave Theory, wave iv should be the opposite of wave ii. Wave ii was a rather raggedy 10% pullback, so we may just see a "line" or "rectangle" correction or consolidation for wave iv.

  • Actually, wave iv could correct all the way down to just below $1,000 without violating any rules. Given how technically strong gold has been recently, such a deep pullback would only happen if we saw a substantial rally in the US dollar. This seems the appropriate time to remind you that ThirdWave's work on the dollar index suggests a strong countertrend rally of nearly 10% to the 81 area.

  • Given the fact that we're projecting gold to reach around $1,400 per ounce by the time wave 3 is done, however, a modest pullback to around $1,100 is the most likely scenario and would be a great entry point for new longs.

Strategy: Look to take new long positions in gold if and when it pulls back to identifiable support in the 1091 to 1105 range. Traders may consider taking profits at around 1235 to 1240 in anticipation of such a pullback. Selling short gold or related issues is a low-risk entry here as long as stops are in place on any close above 1245.

See also, Five Reasons Gold Is Great in the Long Run.

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No positions in stocks mentioned.

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