When things go wrong with one’s Elliott Wave
count, it normally means that there is an error in the prior wave count.
There is nothing one can do except eat humble pie and wait until the picture
clarifies sufficiently to enable a revision of the prior count.
The recent decline from the 17 March 2008 peak of $1011 (PM fixes) to
the low of $740 on 11 Sept 2008 was the largest decline in absolute and
percentage terms since the gold bull market started. As such, this decline
becomes a candidate for Major TWO in the revised wave count. This would place
the Major wave ONE peak at $1011 (17 March 08) and not at $725 in May 2006,
as in the previous count.
This now becomes the preferred count and is illustrated in the monthly
chart below. The decline to $740 is not depicted in this chart which only
contains data updated to 31 August 2008.
Under the previous count, Major ONE was shown where Large III is
marked on the chart. The original count for Major ONE was never entirely
satisfactory and the current one sits far more comfortably. The reason flows
from the following assumptions about the magnitude of corrections in the
different levels of corrections:
The bull market consists of five Major waves designated ONE,
TWO, THREE, FOUR and FIVE. Major TWO and Major FOUR are corrective waves with
a 25%-30% magnitude of anticipated decline.
Major upward impulse waves, ONE, THREE
and FIVE will each contain 5 Large
waves designated in Roman Numerals, I, II, III, IV and V. Large II and Large
IV are corrective waves with a 16% magnitude of decline, give or take a
couple of percentage points.
Large waves I, III and V will each
contain 5 Small waves
designated 1, 2, 3, 4, and 5. Small waves 2 and 4 are corrective waves with
approximately 8% magnitudes of decline.
Small waves 1, 3 and 5 will each contain
five Minor waves designated
i, ii, iii, iv and v. Minor waves ii and iv are corrective waves, each
declining 4%, give or take 1-2%.
Under the previous count, Major TWO was 23%, slightly less than the
25-30% range suggested above for Major TWO. There is nothing holy about these
percentages. They did not come down the mountain carved in stone. They are
simply relationships that were picked up in the early stages of the gold bull
market. The purpose is to help differentiate between the various wave sizes.
The Major wave corrective percentage is still a guesstimate as we had
not experienced a correction of the major magnitude in the bull market until
now. It could conceivably have been much larger than 25-30%.
The following are the new wave counts for Major ONE and Major TWO:
There is no guarantee that Major TWO has been completed. The above
count may be Large wave A of a much larger corrective structure. There are,
however, a couple of reasons for thinking that Major TWO may have been
completed at $740 on 11 Sept 08. These are as follows:
- The
relationship between the A and C waves should have some form of Elliott
relationship with each other. In this case it seems wave C is
approximately 1.618 times wave A. The loss in wave A was $158, and 1.618
x $158 = $255. If we deduct $255 from the wave B peak of $986 we get a
target of $731. This is very close to the PM fix low of $740 and a cash
market low of $736.
- The
magnitude of the overall decline at 27% is adequate for a Major TWO
correction, which was anticipated to be between 25% and 30%.
- The
38% retracement of the entire move from $256 to $1011 (a typical Elliott
relationship) comes in at $723, just under the lows reached last week.
- There
are emotional relationships that are typical of those expected at Wave
TWO and Wave C lows, relationships that have occurred. These are
examined in a separate section below;
The following chart depicts to more recent price action in the gold
market:
Regarding the emotions evident in different waves, a friend recently
reminded me of the following:
Wave 1 being Disbelief (false dawn,
buddy),
Wave 2 being Pessimism (I told you it
wouldn't last!!)
Wave 3 being Optimism (hey lets get on
board!)
Wave 4 being Opportunity
(buy the dips!)
Wave 5 being Euphoria (going to the
Moon!)
Wave A being False opportunity
Wave B being False rally
Wave C being PESSIMISM.
There can be little doubt that pessimism and fear were the prevailing
emotions last week. Gold shares were hammered mercilessly, silver retraced
nearly 50%, some well known advisors, previously bullish on gold, issued a
sell signal. Lehman Bros was allowed to go to the wall. Pessimism is at its
strongest at the end of a C wave in a Major wave 2. That condition was
certainly met at the $740 low in gold.
Looking ahead, if $740 was the low for Major TWO, then the market must
be moving into Major THREE, which is expected to be a very strong upward wave
with many huge surprising rapid gains. The sharp $100 leap in gold over the
past 24 hours certainly fits this expected pattern.
One large daily rise does not a Major THREE make. More evidence is
required. Once we are satisfied that $740 was really the low point, we can
consider the template for the structure of Major THREE, including a revised
target for that move.
One final comment, I do not wish to totally abandon the previous
count. Although it is now the less likely outcome, it is not totally
eliminated. It will really only be important at the end of Major THREE as it
will affect the number of waves to the peak from here. It is just something
that needs to be kept in mind for later. If we are really in Major THREE, it should
be up, up and away for gold from here.
Alf Field
Disclosure
and Disclaimer Statement: The author is not a disinterested party in that he
has personal investments gold and silver bullion, gold and silver mining
shares as well as in base metal and uranium mining companies. The
author’s objective in writing this article is to interest potential
investors in this subject to the point where they are encouraged to conduct
their own further diligent research. Neither the information nor the opinions
expressed should be construed as a solicitation to buy or sell any stock,
currency or commodity. Investors are recommended to obtain the advice of a
qualified investment advisor before entering into any transactions. The
author has neither been paid nor received any other inducement to write this
article
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