The Gold Correction

03/09/07 11:21:21 AM

by David Penn

Divergences tell the tale of the March bounce in June gold.

Security: GCM7
Position: N/A

There were a few additional thoughts on gold that I didn't want to cram into my earlier article on the subject, "Waving The Gold." While those thoughts aren't Elliott wave–related, they do support the "lower before higher" case that suggests that the correction in gold has room to run.

FIGURE 1: GOLD, JUNE FUTURES, DAILY. The late February/early March correction in June gold retraced just over 61.8% of the rally from the January lows. The bounce that began in March appears to have run into resistance at another Fibonacci retracement level, 38.2%.

Graphic provided by: Prophet Financial, Inc.

June gold has been pretty faithful to the limits of Fibonacci retracement. The correction itself bounced shortly after breaching the 61.8% Fibonacci retracement of gold's advance from early January to late February. And the current correction appears to have topped just as it was testing the other key Fibonacci retracement at 38.2%. Note that this retracement level also coincides with gap resistance from the early March portion of June gold's decline. (See Figure 1.)

FIGURE 2: GOLD, JUNE FUTURES, 15-MINUTE. A positive divergence in the MACD histogram signaled a key low in the decline of June gold. But the rally that followed has been accompanied by a growing negative divergence in the same indicator, increasing the likelihood that the move higher will be corrected.

Graphic provided by: Prophet Financial, Inc.

The intraday line chart of June gold in Figure 2 shows not only the positive divergence in the moving average convergence/divergence (MACD) histogram that led to the bounce, but also the lengthy and growing negative divergences that threaten to end the advance. Moving average support (in red and blue) remains a possibility, and the consequence of the negative MACD histogram divergences could be sideways trading rather than movement that is sharply downward. Yet given the sharpness of the initial correction from the late February high, and the sharpness of the early March bounce today, traders could be forgiven for hoping for a more lasting meaningful correction — as opposed to a V-shaped one — that might produce a more lasting move higher to the February highs and beyond.

David Penn

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

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