Gold To Fall 34%?

05/30/08 09:35:39 AM

by Alan R. Northam

Using Elliott wave analysis we can calculate that StreetTracks Gold Trust Shares should fall approximately 34% from current price levels.

Security: GLD
Position: N/A

The StreetTracks Gold Trust Shares (GLD) made a market top in mid-March 2008. Since that time it has been working its way lower in a series of waves. I have labeled these waves as waves (1) and (2), and waves 1 and 2. Waves (1) and (2) are part of a five-wave impulse wave of which waves (3), (4), and (5) have not yet been completed. With waves (1) and (2) complete, wave (3) is currently unfolding in the downward direction. Wave (3) is subdividing into five subwaves labeled wave 1, 2, 3, 4, and 5. Waves 1 and 2 are now complete and wave 3 is unfolding in the downward direction. If you look a little closer at the chart of GLD (Figure 1), you will note that wave 3 of wave (3) is currently in progress. Third waves are typically contain the most momentum in that they travel the furthest distance in the shortest length of time. When the market is in wave 3 of wave (3), momentum is multiplied because both waves are in their strongest momentum waves. Therefore, expect wave 3 to move downward to its completion very swiftly. As you can see from Figure 1, wave 3 has been gapping down as if it cannot complete itself fast enough.

FIGURE 1: GLD, DAILY. The price chart of StreetTracks Gold Trust Shares, showing Elliott wave count.

Graphic provided by: StockCharts.com.

To determine the price of GLD at which wave 3 should be completed, all we need to do is take the price swing of wave 1 (93.71 - 83.57 = 10.14), multiply by the Fibonacci number of 1.618 (10.14 x 1.618 = 16.40), and subtract this difference from the price peak of wave 2 (92.11 - 16.40 = 75.71); the result is $75.71. Therefore, wave 3 down should end at the price target of $75.71 or about 18% lower from the peak of wave 2.

Once wave 3 is complete, GLD should then enter into a wave 4 corrective move. Wave 4s are for the most part sideways movements, so I would not expect GLD to do much in the way of undergoing a corrective rally that would move GLD higher in price. Then once wave 4 is complete, GLD should then continue downward to new lower prices to complete wave 5. Once wave 5 is complete, that will also complete wave (3) down.

We also have enough information to estimate the completion of wave (3) down. To determine the price of GLD at which wave (3) should be completed, all we need to do is take the price swing of wave (1) (100 - 86 = 14), multiply by the Fibonacci number of 1.618 (14 x 1.618 = 22.65), and subtract this difference from the price peak of wave (2) (94 - 22.65 = 75.71); the result is $71.35. Therefore, wave (3) down should end at the price target of $71.35. Since the completion of wave 5 also completes wave (3), and since wave (3) is expected to end at $71.35, we can now estimate that wave 5 should end at $71.71.

In conclusion, wave 3 is expected to move lower and to be completed at a price target of $75.71, which is 18% lower from the peak of wave 2. We also expect wave 4, a corrective wave, to end at about this same price level, since fourth waves typically move in a sideways direction. We then expect wave 5 to continue to move lower and should end at a price target of $71.35, which will also complete wave (3). We can then expect wave (4) to move sideways followed by a final fifth-wave move lower, wave (5). Wave 5s typically travel the same distance as wave 1s, so we can then expect wave (5) to be completed at a price target of $57 or about 34% lower from current price levels.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.