Gold Forecast: Gold Bracing For A Correction

Sunday, August 18, 2019

fine gold

Last week's trading witnessed gold forming both its high and low for the week in Tuesday's session, here doing so with the tag of the 1546.10 figure first - before spiking down to a low of 1488.90. From there, an sideways-to-up consolidation was seen to end the week. For the stepped-back view, we are looking for a peak of significance in the current timeframe, which may well have topped with the most recent swing high - though that has yet to be confirmed.

Gold Cycles, Mid-Term

For the short-term picture, there have been many smaller-degree correction phases in recent months, each of which we noted would end up as countertrend affairs, due to the configuration of the mid-term cycles - which were headed higher into the current month of August. With that, gold is now looking for a larger percentage correction, due to play out in the next month or so. Take a look again at the chart below:

The chart above shows the 72-day cycle, which is projecting lower into the early-Autumn period. This cycle - in addition to a smaller 34-day component that we track - should be responsible for the next correction phase.

In terms of price with the above, the ideal path is looking for a correction back to or below the 72-day moving average into that timeframe, a move which is expected to end up as countertrend - against the early-May trough. If correct, the larger rally phase can continue to play out into late-2019 or beyond.

With the above said and noted, has gold already seen its high for this cycle? Right now this is speculation - though the most recent high came at or into the range where we were expecting it to. Right now, the only way that we could actually confirm this peak to be set in place would be for a reversal below the 1466 figure (December, 2019 contract), though we expect that number to rise markedly in the coming days.

Since a cycle will revert back to a moving average of the same length approximately 85% of the time, the downside 'risk' is obviously over 140 points from current price levels. Having said that, since the 72-day moving average is trending higher, it will obviously be at a higher level as we continue to move forward.

Gold's Commercial Hedgers

Though the coming decline phase with the 72-day cycle is anticipated to end up as an eventual countertrend affair, I am entertaining the idea that it could be larger than expected. That is due to the configuration of the commercial hedgers, which are holding their largest net short position in several years:

The commercials are holding their largest short position seen since the July, 2016 price top - where they were holding some -340,000 contracts. From that July, 2016 peak, gold fell 250 points into the December, 2016 bottom. While I am not suggesting that we will see the same here, I do made the inference that the coming decline could be bigger than is expected.

The alternate to the above is that we simply get our normal decline phase with the 72-day cycle into early-Autumn, one which sees the hedgers covering some short bets - before re-positioning these on the next rally into late-2019. From there, we would set up for a larger decline with our next cycle, the 310-day component:

The 310-day cycle is really the largest wave that we track in the gold market, and - at least until proven otherwise - is seen as pointing higher into the late-2019 to early-2020 timeframe. Once it does top out, however, then - depending on where gold is trading at the time - the downside risk will be high, due to the fact that our 310-day moving average is well below current price levels. Even said, this is not too much of a concern at the present time.

The Bottom Line for Gold

The bottom line for the gold market is that we are in the process of completing an Elliott five waves up from the early-May bottom, and with that are looking for a normal three-wave corrective affair in the next 3-8 weeks. Until proven otherwise, that move is expected to end up as countertrend, and, once complete, should give way to another larger rally into late-2019 to early-2020 timeframe - before a more important top takes hold.

U.S. Stock Market Update

From the comments made over the past month or so, the next correction of significance for U.S. stocks (as measured by the S&P 500 index, or SPX) was expected to come from the 90-day time cycle, which also topped the smaller 45-day cycle that we track - and which is more dominant inside of current price action:

With the above said and noted, the next low of significance for stocks is expected to come from the combination of the 45 and 90-day time cycles, with a key level being the 200-day moving average (chart, above). This moving average is currently sitting at or near the lower (and rising slightly) 180-day channel line - thus making it a very important level going forward.

In terms of patterns, our assumption has been that the correction phase of the 45 and 90-day waves will end up as a countertrend affair, against the early-June trough of 2728.81 on the SPX. If correct, then the probabilities are 80%-or-better that the next upward phasing of these cycles will take the index back to new all-time highs, before setting up a more important price peak. In terms of time, that peak is expected to come sometime between the late-2019 to Spring of 2020 range, and is favored to give way to a much larger percentage decline into later next year - though it is too early to discern the exact details on how this decline will play out. More on this as we move forward in the cyclic configuration.

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.