On Sunday, August 21, I wrote an article on Seeking Alpha calling for a potential top in gold at the $1,915 level. It was published the following day. Specifically, I stated that:
The next potential levels that can provide a top for gold are the Fibonacci 2.00, 2.236 and 2.382 extensions. This would relate to top projections of $1,915, $2,111, and $2,232 levels. Again, since we are most probably in the final stages of this parabolic fifth wave “blow-off-top,” I would seriously consider anything approaching the $1,915 level to be a potential target for a top at this time.
On Tuesday, August 23, gold hit $1,911.46 an ounce and immediately reversed. On Wednesday August 24, 2011, gold fell more than $100, one of the steepest declines in its history. The price of gold is now more than $130 below Tuesday's all-time high.
So Where Does Gold Go From Here?
If gold has actually hit its multi-year high, then we will know within the next month or two, as gold will initially confirm a multi-year top by breaking below GLD 153 in a very hard and impulsive decline, ultimately slicing through GLD 145.
But I am going to analyze the possibility of gold finding support so that, if the yellow metal does not break down from a potential multi-year top, you will know what to look for and how to trade it.
Therefore, assuming that a multi-year top has still not been hit, we will now look for a retracement of some sort, which will find support at a standard retracement level. As we seem to have completed a 5-wave move with our top on Tuesday, and also assuming it was only a top of a wave 3, we will need to look for the standard retracements of a wave 4.
Elliott Wave Guidelines
Usually a wave 4 will retrace back to the .236 or .382 Fibonacci retracement level of the entire wave 3 move. Furthermore, based upon the guidelines provided to us by Elliott Wave Principle, 4th waves will usually find support at the level of the previous 4th wave of one lesser degree. However, when the 5th wave is extended, the “ensuing correction will be sharp and find support at the level of the low of the wave 2 of the extension."
Elliott Wave Guidelines Applied to GLD
On our chart, wave 3 started at approximately the GLD 102 level, and completed at approximately the GLD 185 level. Therefore, the .236 retrace level is at approximately the GLD 165 level, whereas the .382 retrace level is at approximately the GLD 153 level.
Furthermore, as the wave 2 of the wave 5 extension and the previous 4th wave of one lesser degree are both in the same location – just under GLD 145 – this provides us with a third area of potential support.
Therefore we need to be looking for a move down in gold that will ultimately find support at either GLD 165, GLD 153 or even as low as GLD 144.75.
However, if it becomes clear that GLD has hit a multi-year top and will not find support at any of those levels (which would be based upon other EW principles and guidelines regarding how the wave structure down takes shape), then it is entirely possible that GLD will not find support until at least the GLD 112 level, or even possibly as low as the GLD 68 level.
Upside Potential
In the event that gold does find support at one of the higher levels, then the higher targets for the metal that I left you with the other day are still applicable: $2,111 (2.236 extension), $2,232 (2.382 extension), and $2,429 (2.618 extension).
Furthermore, since wave 5 will ordinarily exhibit some Fibonacci relationship to wave 1, and wave 1 took us from GLD 68 to GLD 120 - a 52-point move - this would potentially allude to our wave 5 (if it has not completed already) being 52 points as well, from the point at which the GLD finds support. Additionally, since commodity indexes tend to have extended 5th waves, it is more likely that the potentially upcoming wave 5 can extend to 64 points (1.236 extension), 72 points (1.382 extension), or 84 points (1.618 extension). This would begin if GLD finds support at a level above 144.75.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GLD over the next 72 hours.
