Gold Forecast: Gold (And Stocks) Potential Cycle Bottom

Sunday, October 6, 2019

bars of gold

Last week's trading saw gold forming its low in Tuesday's session, here doing so with the tag of the 1465.00 figure. From there, a sharp rally was seen into late-week, with the metal running all the way up to a Thursday peak of 1525.80 - before pulling back off the same into Friday.

Gold's 3-5 Week Picture

From the comments made in past articles, the 72-day cycle topped back in early-September, coming on the slight back-end of our expected window for a peak. Back in August we noted that 'Gold Cycles are Peaking', and with that were looking for a decent decline to play out into early-Autumn. Going further, the subsequent action confirmed the high for this 72-day wave to be set in place. Here again is that 72-day component:

In terms of price, our analysis called for a drop back to the 72-day moving average, simply due to my observation that a valid cycle will revert back to a moving average of the same length, on approximately 85% of its downward phases (e.g., 'Cycles & Moving Averages', 2013).

With the above said and noted, we can see on our 72-day cycle chart that our minimum downside expectation was met with the action seen last week, with gold dropping back for a tag of its 72-day moving average.

Having said the above, we noted the decent potential for additional follow-through below the 72-day average, simply based upon the configuration from the commercial hedgers - which are heavily net short. A key retracement zone was identified at the 1425-1458 level for the December contract, which was the 38-50% retracement of the swing up from the May trough to the early-September peak.

In terms of Elliott-wave, I mentioned prior weeks that the recent rally up to the 1543 figure (again, December, 2019 contract) was likely a 'B' wave, and with that would be followed by lower lows - and our expected tag of the 72-day moving average - into early-Autumn. We had identified a more key timeframe for this to play out in our Gold Wave Trader report, and the market did oblige us - by making new lows into that timeframe.

With the above, it is certainly possible that our 72-day cycle bottom was registered with the most recent tag of the 1465 figure. Having said that, this can't be confirmed, and we are watching our key upside reversal in the days ahead, for that actual confirmation.

Gold, Short-Term

As mentioned, we have the potential that gold has bottomed our 72-day cycle, though it can't yet be confirmed. With that, there is still some potential that a drop back to or below the recent lows will be seen in the coming days. Either way - regardless of whether the metal has bottomed this component - we have a key short-term date that we are watching for the next smaller-degree low to form. That low should come from our smallest-tracked cycle, the 10-day wave, which is shown on the chart below:

The action of this 10-day cycle is going to be very telling in the days ahead, in regards to the stepped-back view. That is, if gold has bottomed, then we would expect to see only a secondary trough forming. If our 72-day wave has not bottomed, then a lower low can still materialize - at least until our key upside reversal level (noted in our Gold Wave Trader report) is overtaken.

Gold's Mid-Term Outlook

I have done detailed statistical studies on each cycle that we track in our market report. These studies are key, as they tell us what to expect regarding the upward and downward phases of each wave. With that, since we know that it is our 72-day cycle that will be responsible for the bottom here into early-Autumn, and with that we want to know how it tends to 'act' on its upward phasing.

In terms of price, the average upward phase for our 72-day wave has seen a rally of 16.1% off of its prior bottom. Having said that, I am always interested more in minimums, and with that the greater-majority of these rallies have been at least 8.1% before topping. With that, even in taking the statistical minimum, we can see the decent potential for a push back above the 1566 swing top going forward, and with at least some shot that a move into the low-end 1700's could be seen. I have my doubts that we will see the higher figure, simply due to the large net bearish position held by the hedgers.

Gold Commercial Hedgers

With the action seen last week, the commercial hedgers covered a decent chunk of shorts, approximately 42,000 contracts - which drops their current net short total down to -303,688 contracts, with the data current to the 10/1/19 close. Here is the chart:

With the above said and noted, we have the hedgers covering into the recent weakness, which may be seen as a mild technical positive going forward - and would be supportive of the next upward phase of the 72-day cycle, if their current pattern should continue.

On the flip side to the above, the hedgers are still holding at or near one of their largest bearish positions seen in recent years. I view this as bearish for the mid-term, and supports the idea of a much more important top forming in the coming months, something we have gone into in detail in our Gold Wave Trader market report.

U.S. Stocks 'Mini-Crash' Potential Fulfilled

As pointed out last weekend, there was the potential for a 'mini-crash' type event in stocks, due primarily to the fact that the month of October is notorious for the same - and is also notorious for its wide-swinging action. With that, the early-week rally attempt seen in last week's trading saw the SPX pushing up to a Tuesday high of 2985, before dropping to a low of 2855 in just two trading days - a decline of 130 points.

With such a sharp decline - in such a short time span - this certainly met the potential for a 'mini' event, before rallying just as hard into the weekly close. Take a look at the chart below:

As mentioned in recent weeks, we knew that the recent downward phase would come from our 45-day cycle, which recently moved into the early-end of its bottoming range. With that, our low for this wave may well have been registered with Thursday's tag of the 2855 SPX CASH figure, though it can't yet be confirmed.

In terms of patterns, our expectation was for a countertrend decline into the anticipated 45-day cycle low - which simply meant a correction which remained above the 2822.12 (SPX CASH) swing low from back in August. So far, that assumption has been met, though it is too early to actually confirm this cycle to have troughed - thus offering up the potential for another try at weakness in the coming days.

For the bigger picture, however, if the (countertrend) pattern noted above does end up as correct, then the index should see a push back to new all-time highs in the weeks/months ahead, before forming our next major price peak for stocks.

Jim Curry

The Gold Wave Trader


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Jim Curry is the editor and publisher of The Gold Wave Trader and Market Turns advisories - each of which specializes in the use of cyclic and statistical analysis to time the Gold and U.S. stock markets. He is also the author of several trading-related e-books, and can be reached at the URL above.