Gold plunge offers up short-term trades «
Using Elliott Wave to analyze of gold reveals the most likely path that prices will take after the precipitous decline seen on Monday April 15. The bottom line is there is more downside ahead. Let us start with the weekly chart.
By drawing Fibonacci grids from two significant lows to the September 2011 high of $1920, we get a confluence of retracements around the $1300 level. The 50% retracement of the move from $680 to $1920 comes at $1300, and the 38.2% retracement of the move from $251 to $1920 lies at $1282.
The second chart above shows that the correction from the $1920 high is taking a three-wave pattern (ABC). Elliott Wave theory says that wave C is usually related to Wave A by a Fibonacci ratio, and we notice that a 123.6% projection will take the price of gold to $1301.
Elliott Wave theory says that all moves in the direction of the immediate trend will unfold in a five-wave pattern. The third wave is normally the strongest wave, and 3rd sub-wave within the third wave will be the most powerful mover. We have probably completed this 3rd subwave at $1321, and so are seeing a corrective 4th wave underway now. It is normal for the 4th waves to correct the prior third wave by 38.2% or occasionally by 50%. These retracements lie at 1423 and 1455 as shown in the next chart.
It is very likely that from around 1420, (outside chance for 1450), we will see gold come off once again to retest Monday’s low, and potentially break it to reach the $1300 or even $1285. That move will still be considered the end of the larger third wave, and so we will witness some more days of back-and-forth movement to complete a complex fourth wave of a higher degree. These movements are going to present an alert trader with several low-risk trading opportunities. On balance, it is going to be generally less risky to trade from the short side during this phase.
Some readers might wonder if Elliott Wave theory was helpful to anticipate this massive selloff. The answer is a clear yes. It was possible to identify the impending selloff as far back as February 2013 as seen in the chart below. Gold was trading at $1615 when I warned readers of my blog that we should be looking to establish short positions. A conservative target was placed at $1450, which is now likely to become a strong resistance.