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Large Move Coming In Gold

|Includes:SPDR Gold Trust ETF (GLD)

Two of the concepts that I regularly focus on at The Refined Investor are fractal energy and the order of market movements. Based on these concepts, gold is poised for a large directional move in the near future.

Fractal energy refers to how much underlying potential there is for a directional move on the charts. While more complicated indicators can be programmed into your charting package, simply using the current Bollinger Band Width can give you a rough idea on what is happening on the charts.

If we look at a gold chart for the last 3 years we can see these periods of high fractal energy (denoted by a low Bollinger Band Width) and how they led to trending directional moves afterwards. Up until the September 2011 peak in gold they typically released upwards, and since then they have typically released downwards.

Gold Fractal Energy

The order of market movements is my version of Elliott Wave. While I am not a strict Elliottician, the psychological aspects of how markets move can provide insight into where an asset class is in the big picture. The large trending 3rd Wave is definitely a real thing, and so is the typically-sideways 4th Wave that follows. Those two concepts alone are worth understanding because they are road markers that reveal where an asset class is in its alternating bull/bear journey.

There is no doubt that gold experienced a Wave 3 decline from the 4th quarter of 2012 into the June 2013 low, and so naturally a sideways Wave 4 would be the logical reaction by the market afterwards. Because so much energy is expended during a Wave 3 trend, this is the market's way of gathering itself and resting up for the next trending move.

Gold Wave 3 Wave 4

Once a Wave 3 has happened then the cat is out of the bag. Those that were on the right side of the move are patting themselves on the back and those that were on the wrong side of the move are dealing with battered and bruised accounts.

Because the market is designed to cause the most pain for the most people, it doesn't give another Wave 3 trend right away for those looking for a mulligan or who are looking to switch teams. Usually what follows is another directional move (a Wave 5) that reaches a new high/low but causes a momentum divergence after the sideways Wave 4 has slowed down the chart.

While I will let you form your own thoughts on gold because I am not debating whether it is still in a bull or bear market right now, here is a recent chart of the Yen as another example of how the market tends to move. We can see the strong Wave 3 trend down, the sideways Wave 4 consolidation, and then the final Wave 5 down that made a lower low but with a momentum divergence.

I always strive to remain objective when looking at the charts because every asset class goes through cycles of bullish price action and bearish price action, and a bearish cycle is not a criticism of the asset class itself. Gold is following a similar pattern to the Yen, and it would not be surprising for something similar to unfold.

The market never moves in the same way twice, but it can definitely rhyme. We are regularly provided clues (such as a buildup of fractal energy and/or common sequences of movements) that help increase our probabilities of making money, and it is our responsibility to analyze those clues objectively and put ourselves in the best position to make good trades.

Good trading all.

Steve Chapman

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: GLD