A remarkable precious metals rally ended in early September. Gold reached almost into a long-term resistance cluster before the advance stopped. The subsequent correction has been unfolding for two months. Its character is choppy, shallow, and time-consuming.
Those who are familiar with our work remember that we turned bullish on metals in November 2018 and expected a significant trend reversal in August. Both signals proved correct. However, the downside action does not look convincing. It is probably not the trend reversal, which we expected. Instead, its character fits better to a correction of the summer rally.
The rally into September took roughly three months and a subsequent two-month correction that does not make any material progress turns out to be most often a counter-trend swing. Put differently, that kind of price action is typical for a correction of the paramount trend instead of the beginning action within a new trend. Moreover, the correction from the end of August counts best as a complex sequence within the Elliott wave framework. This also implies some form of follow-through on the upside.
Most likely, the retracement from September is a corrective swing and gold has one more leg up. Nonetheless, we expect a failure within the 1,570-1,620 cluster as sentiment remains highly elevated. The vast majority of market participants continue to have strong positive expectations for gold and remain fully invested. Evidence-based research shows that a majority with a strong opinion for an asset is most often wrong.
Nonetheless, extreme expectations can persist while a trend continues. A typical technical proportion relationship projects a target within the 1,590-1,620 area. It is also inside the S/R cluster mentioned above. We expect technically oriented market participants to sell around these levels and derail the upside trend once again.
The positive aspect is that another asymmetric short-term trading setup is right in front of us here. The case for a final swing towards the 1,600 level is tradable. The setup derived from an Elliott wave pattern gets invalidated upon reaching the red-dotted horizontal line. Hence, a stop/loss at 1,455 with a target of 1,590 results in a 1/3 risk/reward ratio. Silver could be attractive at this junction, too. Its swing to the downside has a corrective character as well. Another rally could carry silver well above the early September high. The next meaningful resistance in silver is between the 20-21 cluster, which translates to a potential double-digit swing.
The bottom line is that precious metals are likely to unfold a final swing to the upside if they can hold above their short-term support. Gold looks short-term bullish if it manages to stay above 1,478. The case for a final leg up gets into severe problems if gold crosses 1,455 to the downside.
November 6th, 2019