In my most recent few forecasts for subscribers and public articles I've discussed a major correction in gold, and it dropped $208 within three days of that forecast several weeks ago, as gold traders will recall. Last week I wrote about further consolidation being required in what I'm seeing as either a 4th wave likely "Triangle Pattern" that will consolidate the 34 month run from $681 to $1,910 into August of this year, or a three wave "A B C" pattern. We are right now in some form of C wave. It's just a matter now of confirming if we are going to get a "D and E" wave to follow, or the C wave drops lower before we bottom.
A triangle pattern serves to let the "economics of the security" catch up with the prior large movement upwards in price. In essence, the crowd behavior pushed the price of gold a bit too high too fast, and this consolidation pattern lets the fundamentals catch up to price action. We had a parabolic move I discussed many weeks ago, and those always end badly to the downside. The $208 drop in three days is a typical reaction to a spike run like that. At the end of the day though, I had been forecasting what I call a "Wave 3" top and was looking for a multi-week or multi month-consolidation pattern before gold could move higher.
Let's examine what that triangle projection may look like. They take the form of five waves, or what we can call ABCDE in a pattern. The biggest drop is always the "A" wave, and that was $1,910 to $1,702 in three days or less. The next biggest drop is the "C" Wave, and that was $1,920 to $1,793, noting it was a Fibonacci 61.8% drop relative to the A wave. In other words, each successive wave down in the five-wave triangle is smaller. This is due to the sentiment finally shifting and the trading patterns moving from people chasing the hot sector or stock or metal, to the long term investors accumulating the dips.
If we end up consolidating in a "Triangle", then gold should end up looking something like the below pattern I drew, with a target of $2,350 per ounce many months out:
The other pattern we are watching for at TMTF is the ABC correction pattern. We had the A wave down to $1,702, which corrected 50% of the move from $1,480-$1,910 in three days. Rarely do you get a major move down like that and not get some type of "re-test" of that low, but because the fundamentals for gold are strong and getting stronger, we are favoring the triangle pattern still as most likely. With that said, there is a fat and juicy "Gap" sitting in the chart around $1,660 on gold and dropping down there is what a lot of traders are watching. If that were to fulfill, then we will see an ABC correction ending around $1,643, and then gold will begin another multi-month rally to new highs:
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David A. Banister is founder of ActiveTradingPartners.com and chief strategist for TheMarketTrendForecast.com.