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Elliott Wave Analysis: Gold's Bear Cycle Coming to a Close in December

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Aggressive investors should consider accumulating quality gold-producing and gold-exploration small caps, or gold itself, as a bottom is near.

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My firm's last major Elliott Wave analysis of gold came in early September when gold had touched the 1434 area, and in that analysis we called for a re-test of 1271-1285 levels. This was based on our Elliott Wave analysis of the patterns involved since the 1923 spot highs in the fall of 2011. We have been looking for clues to a bottom in this gold bear cycle from the 2011 highs.

Most recently, we noted that we are seeing patterns commiserate with what Elliott Wave theory calls a "truncated fifth wave" pattern. All bear cycles have five full waves to the downside from the highs, and we have been in wave 5 since the 1434 highs. The key then is determining how low that wave 5 will take you in gold, and planning your investments and timing around that forecast.

To qualify for a truncated fifth wave, you have to have a very strong preceding third wave to the downside. In this case, we had that as gold dropped from just over 1800 per ounce to 1181 into late June 2013. As we approached the 1181 areas, we also said that gold has indeed bottomed and should rally strong to the upside. Recently, gold hit a bottom at 1211 spot pricing last week and that is when we began to consider a truncated fifth wave pattern.

We sent this chart to clients about a week ago regarding this possible Elliott Wave theory bottom:

Elliott Wave Analysis

Elliott Wave Theory

If we fast-forward a week later, we had gold running up to 1261, which was the pivot resistance line we told readers to watch for. We hit it on the nose and backed off to 1224 yesterday. We now expect that if gold holds the 1211 area, that we will again rally back up and over 1261 and then head to the 1313 resistance zone. We would like to see gold get over 1313, and if it does, our targets are in the 1560 ranges for gold in the first half of 2014.

Aggressive investors should consider accumulating quality gold-producing and gold-exploration small caps, or gold itself depending on their preferences during these last few weeks of December as our Elliott Wave analysis is signaling a bottom is near. We would again watch 1211 as a key level to hold for this possible truncated wave 5 to work out.

Twitter: @activetrading

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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No positions in stocks mentioned.

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