Gold prices managed to recover by almost $60 from the bottom of 1183 to 1238 so far. Are the bears surrendering or just regrouping?
In our previous analysis of gold we mentioned about our expectations of the yellow metal rising back to the 1230 area, after having bottomed at 1183 the week before. We supported the forecast with the chart you will see below, saying that we are probably in the corrective wave (4) to the upside.
Today, a week later, gold climbed as high as 1238. The question seems to be “is wave (4) over?”. If the answer is “yes”, we should prepare for another decline in wave (5). But how do we determine if the corrective rally has ended? We do not. Because “to determine” means “to guarantee” and in the Market there are no guarantees. However, we could combine three approaches, that would show us if the odds are on our side – channeling, Fibonacci levels and, of course, Elliott Wave Principle. You can see the first two applied on the chart below.
First comes the channeling technique. Impulses usually develop between two parallel lines, thus forming a channel. The important thing is that you cannot draw a channel before you are sure that the third wave is over. In this case – it is – so we draw a line between the bottoms of wave (1) and (3). Then we draw a parallel line from the top of wave (2). Normally, wave (4) would face resistance when meeting it.
Second, 38.2% is a Fibonacci ratio, where fourth waves often end. As the chart shows, gold has just touched that level plus the upper line of the channel. This is a double resistance.
If we want to apply an Elliott Wave count, we have to move on to a smaller time frame chart and see if the rally from 1183 to 1238 is a correction. In order to be one, it has to consists of only three waves.
As shown, there is an A-B-C zig-zag on the 30-minute chart of gold. Wave C takes the form of an ending diagonal, which has just been broken to the downside. This is another reason to expect weaker XAUUSD in the days ahead. If this is the correct count, the support zone around 1180 may finally surrender… for a while.
