Yesterday’s Elliott wave analysis was confident for several technical analysis reasons that a downwards breakout should happen, and it did.
Summary: Downwards movement should continue. The new target for it to end is at 1,038 – 1,035. Along the way down, if the structure is complete when price gets below 1,072, then it is also possible it may end earlier. Use the bright aqua blue upper trend line on the hourly chart as the first line of resistance. Only if the upper edge of the orange channel on the daily chart is clearly breached, then would an end to this downwards movement be indicated.
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Changes to last analysis are bold.
ELLIOTT WAVE COUNT
Cycle wave a is an incomplete impulse.
Within primary wave 5, the daily chart focuses on the middle of intermediate wave (3). Within intermediate wave (3), minor wave 3 now shows a slight increase in momentum beyond that seen for the end of minor wave 1 at the left of the chart. Third waves for Gold usually have clearly stronger momentum than its first waves, so I still expect to see a further increase in downwards momentum. The strongest downwards momentum may appear in a fifth wave somewhere within minor wave 3, or maybe the fifth wave to end minuette wave (iii) or minute wave iii, or that to end minor wave 3 itself.
Draw a base channel about minuette waves (i) and (ii) as shown (green trend lines). If the steeper orange channel is breached then look for the lower green trend line to provide resistance. Only if the upper green line is breached would I consider the wave count to be wrong.
Subminuette wave iii looks like it is over at the daily chart level. Subminuette wave iii has a typical curved look to it at the daily chart level and this wave count has the right look.
Subminuette wave iv may not move into subminuette wave i price territory above 1,157.14.
Subminuette wave iv was a regular contracting triangle. The structure is clear on the daily and hourly charts. Subminuette wave ii was a relatively deep 0.58 zigzag lasting two days, and subminuette wave iv exhibits perfect alternation as a shallow 0.29 triangle lasting seven days. Zigzags are normally quicker than triangles, so some disproportion would be expected.
Draw a channel about minuette wave (iii) using Elliott’s second technique: draw the first trend line from the ends of subminuette waves ii to iv, then place a parallel copy on the end of subminuette wave iii. Subminuette wave v may end midway within this channel so add a mid line. Along the way down, upwards corrections against the trend should find resistance at the upper edge of this channel.
I would not expect subminuette wave v to be truncated, at today’s low. So I would expect price to keep falling from here to at least below the end of subminuette wave iii at 1,072 to avoid a truncation.
Once price is below 1,072, look for the structure of subminuette wave v to be a completed five wave impulse on the hourly chart. Once that is clear, a subsequent breach of the upper edge of this orange channel would provide trend channel confirmation that minuette wave (iii) would be over and minuette wave (iv) would have begun.
Minuette wave (iv) should unfold sideways. It may be very shallow because minuette wave (ii) was relatively deep at 0.52. Minuette wave (ii) lasted three days and was an expanded flat. Minuette wave (iv) may exhibit alternation as another triangle or a zigzag most likely, and may last about five to eight days.
At 957 primary wave 5 would reach equality in length with primary wave 1.
So far there is a five down complete to break out of the triangle. I have checked the structure within micro wave 1 on the five minute chart which does subdivide perfectly as an impulse with (for Gold) a typically sideways time consuming second wave compared to a short shallow fourth wave, giving this impulse a curved look at the hourly chart level. Within micro wave 1, it was the fifth wave to end its third wave which was the strongest part of this downwards movement.
Micro wave 2 is a complete three wave structure and a typically deep second wave at 0.66 of micro wave 1. Micro wave 2 perfectly found resistance at the lower B-D triangle trend line extended outwards. It was almost at the point in time where the triangle trend lines crossed over that a trend change was seen; this is almost where micro wave 2 ended and micro wave 3 began. Yesterday’s analysis had expected the whole of subminuette wave v to end at this point in time, but that’s not how it is unfolding.
It is extremely unlikely that subminuette wave v is over at today’s low labelled micro wave 1; there would be a huge truncation at 10.59 which would look wrong at the daily chart level. It is much more likely that this is only micro wave 1 of a five wave impulse for subminuette wave v.
At 1,064 micro wave 3 would reach 1.618 the length of micro wave 1. Micro wave 3 should show an increase in downwards momentum beyond that seen for micro wave 1. Within micro wave 3, its second wave correction is yet to unfold which may not move beyond the start of micro wave 3 above 1,095.55.
The bright blue aqua trend channel is a base channel about micro waves 1 and 2. Along the way down, upwards corrections should find resistance at the upper blue line. This almost always works, but almost always is not the same as always. If that blue line is breached, then the next line of resistance should be either the triangle trend lines (violet) or the upper edge of the orange channel which is also shown on the daily chart.
Micro wave 3 should have the power to break through support at the lower blue line, but first some support for a small bounce may be seen there.
The final target for subminuette wave v is recalculated today because it does not look like yesterday’s target at 1,071 allows enough room down for this whole structure to unfold. That is still possible, so if my new target is wrong it may now be too low. If price reaches about 1,071, and it looks like the structure may be complete, then it is still possible that this wave may end there.
At 1,035 minuette wave (iii) would reach 4.236 the length of minuette wave (i). At 1,038 subminuette wave v would reach 0.618 the length of submineutte wave iii. This gives a $3 target zone calculated at two wave degrees, so it should have a reasonable probability.
Whichever target turns out to be correct (1,071 or 1,038 – 1,035), an end to this wave down would only be confirmed with a breach of the upper edge of the orange channel at the daily chart level. That would indicate an end to minuette wave (iii) and the start of minuette wave (iv).
Weekly Chart: The lilac trend line on On Balance Volume has been breached, which is a longer term bearish indicator.
OBV is now breaking below the shorter green trend line, another bearish indicator.
As price falls volume is increasing and OBV is moving lower. This fall in price is supported by volume at the weekly chart level.
RSI is usually a fairly reliable indicator of lows. At the weekly chart level, RSI is still above 30 indicating there is room yet for Gold to move lower.
Daily Chart: The small pennant pattern looks like is working well. Price is now breaking below the lower edge of the pattern, so a continuation of the downwards trend would be expected from this classic pattern.
Although RSI is oversold, there is no divergence between RSI and price: as price moved lower to the last low at 1,072 RSI also moved lower. I would not expect a larger correction to begin until there is some divergence. If the Elliott wave count is correct, then new lows below 1,072 may see RSI remain oversold for a few more days yet, but it may not make corresponding new lows. However, it may be too optimistic to expect substantial new lows while RSI remains oversold; therefore, the Elliott wave target may be too low.
Today volume is lighter than yesterday. The downwards breakout is so far not occurring on increased volume and may be slightly suspicious. The market can fall of its own weight, because a fall in price does not necessarily require more sellers and may occur with an absence of buyers. However, it is slightly concerning that this downwards day has light volume. If tomorrow sees an increase in volume, then this would no longer be of any concern. Overall, during the formation of the pennant, it was very clearly a downwards day which had strongest volume, so a downwards breakout is still expected as most likely particularly as it comes in conjunction with one of the most reliable classic technical analysis continuation patterns.
ADX continues to rise during the formation of this consolidation. Despite price drifting sideways the trend continues to strengthen and remains down.
A trend following strategy should be used. Trading with the trend is advised. A mean reverting system which allows trades against the trend should only be used by the most experienced professional traders, and for all others it is strongly advised to never trade against the trend.
The simplest system for a downwards trend like this is to use resistance lines: each time price touches resistance that represents an opportunity to enter in the direction of the trend. Trades may be held until price either reaches support, a target, or if the trade is held for one day if you are a day trader. Depending upon your trading style, your risk management, and management of the equity in your account, stops as always are essential: they may be money management stops, they may be just above lines of resistance (allow for small overshoots), or they may be Elliott wave invalidation points.
Corrections against the trend offer an opportunity to join the trend at a good price.
The aqua blue trend line is slightly redrawn today to show exactly where price is currently finding resistance. At this point, I would strongly expect this line to continue to hold while the trend remains down. If price breaks above this line, then a larger correction may be beginning to interrupt this trend.
This approach outlined here is just one trend following method of many.
There is a little positive bullish divergence last week: the low for 23rd July did not move below the prior low of 17th July, but On Balance Volume did make a new low. OBV moved lower while price did not. This bullish divergence indicates a correction against the trend to unfold, which is what has been happening. This correction should resolve this divergence.
The long lower wick of today’s candlestick is slightly bullish, but it is most certainly not a reversal signal. The break below the lower edge of the pennant pattern is more bearish than this candlestick is bullish, so on balance more downwards movement would still be expected.
This analysis is published about 06:00 p.m. EST.