Four Steps Forward, and Three Steps Back

Given that gold prices have declined over $80 since reaching $1363 on September 7th, one might think that we have been under the sentiment of a bear market in gold and that prices will most likely continue to decline.

While that is a distinct possibility, at least for now, gold at its current pricing can be viewed through the eyes of a deep correction, rather than a modestly bullish market that has turned bearish. There is still a strong case that can be made for gold prices moving four steps forward and then three steps back.

When we look at gold prices through this current calendar year, one must acknowledge that the lows seen in January of this year at $1130 per ounce will probably never be seen again in 2017.

We must also recognize that $1300 per ounce has been an area of resistance that was extremely difficult to break and trade above. This can be clearly seen considering that it took three attempts before gold prices traded and closed above it.

During the first half of 2017, gold prices clearly had resistance at $1300 and strong support at $1200. It was the last time gold traded to $1200 per ounce in early July that marked the beginning of a slow and methodical move up to a new yearly high of $1363.

The correction that followed this $160 rally is the current selloff market participants are witnessing. Based on basic Fibonacci retracement theory we can view this decline as a 78% retracement ($1279) of the second leg of this rally (from $$1260 to $1363), or a 50% retracement ($1283) of the full $163 gain (from $1203 to $1363).

Regardless of whether you see the recent upside price move in gold as a single rally or one with multiple legs, the fact of the matter is the recent price decline is a correction that falls within acceptable parameters of a bull market in a corrective phase.

Gold prices currently reside at a critical support level that on a technical basis must be held if the current bullish model is still intact. Furthermore, considering that gold prices were fractionally above $1100 at the beginning of this year, this most recent decline to $1280 is absolutely a solid price gain for this calendar year.

The key to this assumption that gold prices have given back an acceptable portion of the recent price gains is predicated upon gold finding price support in this area and moving back above $1300 per ounce. Most importantly, our current model necessitates a rally which concludes above last year’s high of $1382 to keep this model in play.

If gold prices find support at the recent lows around $1280 per ounce, and begin to trade higher, a strong case can be made that gold prices have been moving Four steps and three steps back. Forward

Wishing you as always, good trading,