Will gold sell off? A possible bearish forecast using Gann method of analysis.
After hitting its alltime high of $1911 per oz in early September, Gold has seen its price consolidate in the $1,525 – $1,800 range for nearly 10 months now . Since then much has been written about the the future course of the gold price. While the gold bulls have been belligerent in their calls for a price of $3,500, the perma-bears have been advocating a $600 price target. I myself am a gold perma-bull and while I believe that the current fair price of gold should be anywhere between $5,000 and $10,000, it is no denying that gold could see a major correction on way to that target. And with the vested international banks determined to to keep a lid on the prices of gold, a major correction could follow.
In this blog post, I try to play the devil’s advocate to my bullish bias and attempt to formulate a possible bearish scenario and how it could unfold using Gann Technology. Since the low price of $255.10 printed on February 16, 2001 the gold price has experienced 4 bull forms (campaigns) as shown in yellow in the chart below. As per Gann, there can only be a maximum of 3 to 4 forms (uni-directional moves) in any bull or bear market. Further Gann has also stated that major bull markets often span a decade and it is no surprise that this bull market had seen a dream run of 10 years and a little over 6 months. With four forms over a decade, the market seems due for a correction.
Ledge formation has ominous connotations for the price of gold
Subsequent to the high being established the gold price corrected sharply and since then has been consolidating to form a ledge like formation with support in the $1525 area (thick green horizontal line). As per Gann, the ledge is an extremely bearish formation and a breakdown from this level could result in a vertical fall.
Gann principles suggest that the gold price could fall very quickly to $1027-$1180 levels, if $1500 is breached
Furher Gann states that post completion of a bull market, the correction should be larger than the largest rally in the previous market and should achieve the price objective in faster time than it took to form the bullish move. The orange box explain this principle and provide a possible bearish target of $1180 to be achieved by September 2012. Further the number of days of consolidation from the all time high to the nearest top of July 2, 2012 is exactly 300 days which is an important natural number suggesting that a new trend may have initiated down.
If we apply the price equals time principle and adjust for scaling it is possible that the market could experience a fall of nearly $600 or a level of $1027. So the indicative bear market price broad range works out to $1027-$1180. Only time will tell. Remember, a break of 1500 is absolutely essential for this forecast to be valid.
Short term formations also seem to suggest topping nature and a possible acceleration in the decline in the price of gold.
Since the all time high, the market continues to make lower tops. It is often seen that after 4-5 lower tops once a major support is broken, price moves tend to get parabolic. The Gann angle drawn from the high of $1911 has served as an important supply line and barring for the false break out during the week starting February 21, 2012, the market has traded well below this gann angle line. Time measurement from the all time high to the nearest top of July 2, 2012 is exactly 300 days which is an important natural number suggesting that a new trend could have have initiated. Further if we apply the price equals time principle and adjust for scaling it is possible that the market could experience a fall of nearly $600
$1525-$1540 last line of defense for this bull market
As shown the thick green line of 1525-1540 zone is a major support. Also notice how the gann angle coming of the lows of January 29, has been providing support to the congestion in price since the recent low established on May 14, 2012. Incidently it is 49 days (square of 7) since then to the minor top of July 2, 2012. The price seems all set to break this gann angle with tomorrow’s trading leaving the $1525 -1540 range as the last hope for the bulls.
Any upside move beyond $1635 would extinguish this forecast and reinstate the bull count. So what is your view. Feel free to express your views and leave a comment.
Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither http://winningtrades1.com or myself accepts any liability arising out of the above information/articles.
|Vinit Bolinjkar Head of Research, Ventura Securities Ltd|