The New Gold Bull Market?

07/07/05 11:31:09 AM

by David Penn

Are gold bugs mis-reading EWT in order to arrive at a bullish outlook for gold?

Security: $HUI
Position: N/A

There is an Elliott wave count currently making the rounds of the gold bugs that I fear might be flawed. That this count comes from an analyst whose work I respect might be troubling if it weren't for the fact that this analyst — who admits to being far from an expert in Elliott wave methodology — gives due respect to the "deflation side" of the great, post-dot.com bubble "inflation/deflation" debate. As such, I can't help but feel as if his relatively bullish, EWT-inspired take on gold it really just an attempt to give some due to those who hold a macro argument of which he is not entirely convinced.

That said, it is no secret that most Elliotticians remain decidedly bearish on gold. And the combination of that bearish outlook and the wave count circulating among some gold bugs might be especially confusing to those who embrace much of what the Elliotticians have had to say about contemporary finance, but remain wedded to the notion of a secular bull market in gold rather than a cyclical one.

One popular Elliott wave count of the $HUI that is making the rounds could provide gold bugs with hope they can ill afford.

Graphic provided by: Prophet Financial, Inc.

My technical quarrel with the above wave count is that it posits that the $HUI, or the index of unhedged gold stocks, has completed not only a five-wave advance, but also has completed a three-wave correction. Were this to be the case, then gold bugs would be more than justified in their belief/hope that gold, or at least the lower-priced gold mining shares that make up the $HUI, were headed significantly higher in the near term.

However, I do not believe this to be the case. And the wave count shown above serves as evidence. The count in Figure 1 has the end of the A-B-C correction bottoming around 175. However, completed A-B-C corrections need to retrace into the territory of the fourth wave of the preceding five-wave advance before being considered complete. This would require the third leg of the correction, the "c" leg, to fall much further than where those supporting the above EW count are suggesting that it has already ended. That "further" would be in the neighborhood of 100, where the above count suggests that the five-wave advance's fourth wave put in its fourth-wave low.

There is another reason to question the bullishness of the $HUI at this point. Note the depth of the MACDH extreme during the "a" leg of the correction. As I have written here and in Working Money, the lows registered during MACDH extreme troughs must be exceeded or "confirmed." That confirmation may come in the same decline. Other times, a significant bounce might develop in between the current decline and the next one--the "next one" being the decline that will see the lows during the MACDH extreme trough violated. But the absolute low price on a decline rarely occurs simultaneously with the absolute low in the MACDH.

Thus, the MACDH also seems to suggest that the correction in the $HUI is not concluded. Given the gold bug's wave count in Figure 1, a retreat to the 100 level, it seems to me, is more likely in the near-term than a vault to 300.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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