Gold's Recent Uptrend: Bona Fide OR Bona Fraud?

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Gold's Recent Uptrend: Bona Fide OR Bona Fraud?
EWI's Metals Specialty Service explains what gold must do to start entertaining a bullish outcome

By Nico Isaac
Thu, 27 Oct 2011 15:30:00 ET

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Today, I'm talking with EWI's Metals Specialty Service editor Mike Drakulich about the recent volatile price action in the world's most watched precious metal: gold.

Nico Isaac: Mike, let's go back a few days and review the analytical steps you took to stay, in a word, "downwind" from gold's near-term scent. In the early morning hours of Monday, October 24, gold's Elliott wave count stepped on a technical "twig" -- causing you to perk your ears in an entirely new direction.

At 7:56 AM, you released a Metals Specialty Service intraday update saying how recent events have caused you to "lose confidence in gold's downside" What were the clues that guided your analysis?

Mike Drakulich: Elliott wave patterns can develop in one of two ways: In five waves, which indicates an impulsive move that goes IN the direction of the larger trend -- OR, they can unfold in three waves, which indicates a corrective move that will ultimately be retraced. Gold's decline from Thursday's (Oct. 20) high did not unfold in five waves. So, when the subsequent rally retraced 62% of the decline, that was enough for me to start looking higher.

Nico: On October 25, gold soared over 3% in its biggest one-day rally in years. That day, at 2:36 PM, your Metals Specialty Service intraday gold update presented a newly updated chart of the metal where you labeled price action since late September, in Elliott wave terms, as a double zigzag rally. For Elliott wave newbies, what is a double zigzag?

Mike: Two zigzags put together. Two simple 3-wave moves labeled "a-b-c" linked by a 3-wave move labeled "x" - basically, just an extended corrective pattern.

Nico: So, gold's been correcting higher since late September?Are there any rules or guidelines of double zigzags that hint at when and where the pattern may end?

Mike: One measure is equality between the two "a-b-c" zigzags. Another is Fibonacci relationship of the first zigzag to the second zigzag.

Nico: How about other technical tools?

Mike: Yes, I like to use RSI (Relative Strength Index), moving averages, Fibonacci price levels, and trendlines -- when and where applicable.

Nico: On October 26, your Metals Specialty Service intraday update called attention to another "huge question" in gold right now: "How important a top is in place at the September 2011 all-time high?" How do you answer it?

Mike: We need to see whether key support price levels I show in my Service hold. We also need to observe how gold's Elliott wave patterns are unfolding. So the answer may take a while. Right now, I'm trying to forecast more from the "inside out" -- meaning, I'm using the near-term patterns to try to determine how the larger patterns might resolve.

Right now, Metals Specialty Service reveals what gold's "key support" is, and what Elliott wave patterns suggest for the trend. Get the details with an instant-access subscription >>

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Tags: Elliott Wave trading, Fibonacci, Gold, Relative Strength Index (RSI)

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