After hitting $1565 earlier this year, the precious yellow metal has been in a defined and multi-month correction. Last week our technical studies conveyed a decent probability that we could be at or near the conclusion of the correction. Given that the last major rally took gold pricing approximately $400 higher before settling at $1565 per ounce a sizable correction could easily be seen.

The primary technical study we used to determine where the correction could conclude was Fibonacci retracement theory. This theory utilizes the Fibonacci number sequence, the underlying theory behind the golden mean, Golden section and the Golden string. The sequence itself begins with two numbers zero and one, which are added together to form the third number in the sequence which is one. Then you add the last two numbers which are one and one and equals two (0,1,1,2). This step is then repeated again as you add together the two last numbers of the sequence, in this case one and two, which equals three. Now sum 2 and 3 to get 5, then 3 and 5 to get 8.

The key to the sequence is the relationship between each number and the on that follows it. Because the relationship between each consecutive number in the sequence is always the same; 0.618%.

To create a Fibonacci retracement, you pick two price points in a rally, the starting price and ending price and calculate various levels that are retracement will likely fall to. The first level is the 23.6% retracement, followed by the 38.2% retracement, which is followed by the 61.8% retracement, and concluded at the .78% retracement. An example of using this technique would be if a stock rose from zero to one dollar before a correction began. The first level to watch is how pricing acts at 76.4 cents, which is a 23.6% retracement. If pricing continues to decline once reaching $0.764 you would look at the next level the 38.2% retracement which would occur at, 0.618 cents.

After hitting $1565 earlier this year, the precious yellow metal has been in a defined and multi-month correction. Last week our technical studies conveyed a decent probability that we could be at or near the conclusion of the correction. Given that the last major rally took gold pricing approximately $400 higher before settling at $1565 per ounce a sizable correction could easily be seen.

The primary technical study we used to determine where the correction could conclude was Fibonacci retracement theory. This theory utilizes the Fibonacci number sequence, the underlying theory behind the golden mean, Golden section and the Golden string. The sequence itself begins with two numbers zero and one, which are added together to form the third number in the sequence which is one. Then you add the last two numbers which are one and one and equals two (0,1,1,2). This step is then repeated again as you add together the two last numbers of the sequence, in this case one and two, which equals three. Now sum 2 and 3 to get 5, then 3 and 5 to get 8.

The key to the sequence is the relationship between each number and the on that follows it. Because the relationship between each consecutive number in the sequence is always the same; 0.618%.

To create a Fibonacci retracement, you pick two price points in a rally, the starting price and ending price and calculate various levels that are retracement will likely fall to. The first level is the 23.6% retracement, followed by the 38.2% retracement, which is followed by the 61.8% retracement, and concluded at the .78% retracement. An example of using this technique would be if a stock rose from zero to one dollar before a correction began. The first level to watch is how pricing acts at 76.4 cents, which is a 23.6% retracement. If pricing continues to decline once reaching $0.764 you would look at the next level the 38.2% retracement which would occur at, 0.618 cents.

Unquestionably the utilization of Fibonacci retracement is a key element in forward forecasting and defining potential price points that a correction could terminate at. It is one of the standards, and go to technical studies that a technical market analyst uses in discerning a logical price point to look at.

There is however a large caveat when using this technical study, although it has real relevance in defining various price points that could be close to the actual price when a correction concludes, it does not give the market technician any useful information about the strength of a trend and the subsequent rally will follow. That being said I believe that the price point indicated by a Fibonacci retracement last week was acutely formidable in correctly predicting the exact price that gold concluded it's correction.

At the same time we must recognize that if we do not see follow-through and a trend which begins to gain power rather than slowly meandered to higher pricing or consolidating, the information of a precise bottom will have a much less benefit than a market scenario in which the correction is followed by a strong and volatile upside move.

Although a technical market analyst relies heavily upon mathematical formulas and numbers, one can never lose sight of the primary fact behind any price change in any stock or commodity; the unfolding of new fundamental events that have not been factored into pricing is what moves the market. Mathematics is highly useful in that it distills market sentiment into a quantifiable that can be used to forward forecast price direction.

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Wishing you as always, good trading,

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