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Elliott Waves And Contradiction With Market Price Manipulation

|Includes: GLD, Randgold Resources Limited (GOLD), PHYS, SLV

Why it is believed that Gold price is manipulated?

  • Traditionally, currencies were backed by precious metals. Central banks still reserve gold.
  • Keynesians employ active policies on controlling the economy. In particular, they use monetary policy actions by the central banks.
  • Gold based currencies don't provide enough flexibility for Keynesian governments. Instead they prefer Fiat money which gives them much more flexibility and leverage.
  • Strong Fiat currency reflexes economical stability and certainty for a government.
  • Increasing gold price reflexes fear of political and economical instability and uncertainty.
  • Most of the countries have a non-transparent policy on their gold reserves. In other words the public do not have the right to know about the government's vaults.
  • Instead of keeping their reserve gold bars in the vaults, governments lend their gold to the market to make profit.

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Daily Chart & The fear factor

The fear factor and the economical impacts (Reference: Economist)

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Therefore, it is easy to conclude that governments use their gold as a leverage to fight against the sentiment of fear or uncertainty. This will also explain why the governments would want to reduce the price of Gold and not increase it.

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Characteristics of the Elliot Waves

  • Similar to Fractals, Elliott Waves are recursive and multi layered
  • Elliott Waves are not time based. In other words, formation of a wave could happen very quickly or take a much longer time.
  • Layers of Elliott Waves are flexible. A wave of the layer n+1 can be canceled due to formation of the parent layer n. Therefore, external parameters such as news and important events do not falsify Elliott Waves.

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A simple formation of a Fractal

A simple formation of a Fractal

Sample Fractals (Reference: Eric Dobbs on Fractals)

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How can Elliott Waves continue working even if the price gets manipulated?

The answer is simple: since EW has a recursive structure, with a price manipulation, the current wave gets invalidated and the parent wave takes the control of the next price targets.

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Example

Assume that you are tracing a 4 layered EW with these positions:

Sample 4 Layered Elliott Wave chart

To make the case more readable, the first digit after L represents the layer and the second digit represents the wave. The chart above shows the second wave of layer 4 under the fourth wave of layer 3 under the third wave of layer 2 under the third wave of layer 1. Therefore it could be simply depicted as: L13 -> L23 -> L34 -> L42.

In this example, we are at L42 (red) position and the price is expected to move up to one of the predefined Fibonacci retracement levels (e.g. 61.8%, 50%, etc.). Now assume that in this example, if the price was not manipulated, the average outcome of all the trades would move up to the Fibonacci retracement level of 61.8%. But however, a heavy sale goes through by a manipulator and not only it doesn't reach the 61.8% but the price falls instead of going up and it moves enough to break all the Fibonacci retracement levels of the L34 (purple).

This is where EW shows its power: after the heavy sale, you can easily invalidate the whole L4 wave and adjust the parent wave of L3 to reflect the new price movements.

According to EW, the other traders will now take the control of the market and L3 will become the current wave again. If the move was so significant, you could even invalidate the L3 level and jump up to the parent wave L2.

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Conclusion:

Not only Elliott Waves have no contradiction with price manipulation but they have the flexibility to adjust themselves to any great price movements.