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Gold: Higher, and Here's Why

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Gold prices have just exceeded wave (b) peak of the potential 4th-wave contracting triangle (abcde). If wave (e) ended with the test of 1275, next we should see a thrust above 1300.

We are also seeing a lot of buying in metal-related names on the NYSE, a bullish sign.

Whether this gold rally from the 1179 bottom is ultimately corrective (as in, wave c) or has much higher to go (as in, wave 3), at least one more new rally high above 1297 appears likely under either count you see below.

If this is a third-wave advance, prices should quickly rally toward the 1320-1330 area.

Along with the wave count, which suggests higher highs, another reason to lean bullish is the fact that we have recently registered multi-decade extremes in sentiment indicators.

The Daily Sentiment Index for gold, for example, ( recently hit the lowest level on record. Silver's weekly RSI also recently reached the lowest most extreme level since futures began trading in 1971.

None of this "guarantees" a bottom. But when you combine the likely completing downside wave patterns, daily and weekly RSI oversold readings and divergences, plus the sentiment extremes, you have to at least expect an important interim low.

Let's see if prices can soon move above 1297 and how they handle the 1300 resistance area. However, if 1260 is violated, that could take prices all the way back down towards 1200.

(Adapted from Metals Specialty Service, edited by Mike Drakulich, Elliott Wave International.)

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POSITION:  No positions in stocks mentioned.