Gold Bearish Reversal – Elliot Wave Analysis
Gold has just stopped a couple of points short of the statistically significant $1300 mark and it looks like a reversal is likely at this time.
As you can see on the chart, the precious metal has completed a very typical impulsive Elliot wave structure with the 5th wave extending to a key Fibonacci point at 1.618% (Fibonacci extension of wave 3) at price $1298.5. This idea is linked to my previous gold analysis.
This structure of the Elliot wave pattern is different to common equity analysis as the extension is on the 5th leg rather than the 3rd leg. This is a common pattern for commodities but rare for other asset classes. This subtlety further strengthens my view on a reversal for gold in the near term.
Furthermore, there is a clear divergence in the MACD indicator as illustrated by the dotted red line. This is a significant reversal indicator as it highlights that the momentum on the trend is beginning to fade and a reversal is likely.
As such, I believe a reversal is likely given that there is confluence of multiple indicators, chart overlays and chart patterns. The reversal will likely follow a corrective zig-zag pattern (ABC) with it completing the 3 wave structure between 3 and 4. In my experience, most corrective patterns complete between wave 2 and 3 if a wave 3 extension has taken place. However, since wave 5 has extended in our chart, it will likely see consolidation between 3 and 4 (green rectangle area).
Also bear in mind that there is a chance that gold can continue to rise to the next Fibonacci level at $1312. Fundamental analysis at the moment is a mixed bag and as such we need to proceed cautiously. We currently stand within a complicated market environment where some strategists believe that there will be no more Fed rate hikes for 2019, a sign that the next recession is closer than expected. Conversely, some believe that the bears have had enough and the bulls are back in play for equities.
For a potential sell trade, wait for the confirmatory downward cross in the MA (20) and MA (10) on at least a 3H chart (4H is preferred).
A stop loss can be placed above $1293 (just above the maximum turning point of MA (10))
A take profit can be placed at $1253
Some things to keep in mind that will determine the future performance of equity markets and thereby gold prices:
• Interest Rate Hikes – a cease in rate hike will likely push equities up higher in the short run
• China US Trade War – Apple’s repriced forecast may be a catalyst to end the trade war, returning much needed confidence back into equities
• US Economic Data – Keep an eye on Purchasing Managers Index(PMI), GDP, Unemployment rate and inflation rate
Chart Indicators
Moving Average (20)
Moving Average Convergence Divergence (MACD)
Accumulation/ Distribution with Moving Average (20) overlay
As you can see on the chart, the precious metal has completed a very typical impulsive Elliot wave structure with the 5th wave extending to a key Fibonacci point at 1.618% (Fibonacci extension of wave 3) at price $1298.5. This idea is linked to my previous gold analysis.
This structure of the Elliot wave pattern is different to common equity analysis as the extension is on the 5th leg rather than the 3rd leg. This is a common pattern for commodities but rare for other asset classes. This subtlety further strengthens my view on a reversal for gold in the near term.
Furthermore, there is a clear divergence in the MACD indicator as illustrated by the dotted red line. This is a significant reversal indicator as it highlights that the momentum on the trend is beginning to fade and a reversal is likely.
As such, I believe a reversal is likely given that there is confluence of multiple indicators, chart overlays and chart patterns. The reversal will likely follow a corrective zig-zag pattern (ABC) with it completing the 3 wave structure between 3 and 4. In my experience, most corrective patterns complete between wave 2 and 3 if a wave 3 extension has taken place. However, since wave 5 has extended in our chart, it will likely see consolidation between 3 and 4 (green rectangle area).
Also bear in mind that there is a chance that gold can continue to rise to the next Fibonacci level at $1312. Fundamental analysis at the moment is a mixed bag and as such we need to proceed cautiously. We currently stand within a complicated market environment where some strategists believe that there will be no more Fed rate hikes for 2019, a sign that the next recession is closer than expected. Conversely, some believe that the bears have had enough and the bulls are back in play for equities.
For a potential sell trade, wait for the confirmatory downward cross in the MA (20) and MA (10) on at least a 3H chart (4H is preferred).
A stop loss can be placed above $1293 (just above the maximum turning point of MA (10))
A take profit can be placed at $1253
Some things to keep in mind that will determine the future performance of equity markets and thereby gold prices:
• Interest Rate Hikes – a cease in rate hike will likely push equities up higher in the short run
• China US Trade War – Apple’s repriced forecast may be a catalyst to end the trade war, returning much needed confidence back into equities
• US Economic Data – Keep an eye on Purchasing Managers Index(PMI), GDP, Unemployment rate and inflation rate
Chart Indicators
Moving Average (20)
Moving Average Convergence Divergence (MACD)
Accumulation/ Distribution with Moving Average (20) overlay
This currently represents a good trade opportunity.
Entry: 1289
SL: 1295
TP: 1255