Elliott Wave Gold Update XXII

Alf Field
18 Sep, 2008

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:

Revised Structure of Major Wave ONE: London PM Fixings.

Structure of Major Wave TWO: London PM Fixings.

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:

1. 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.

2. The magnitude of the overall decline at 27% is adequate for a Major TWO correction, which was anticipated to be between 25% and 30%.

3. 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.

4. 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:

Data Updated to 17 Sept 2008

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.

(Personal Note: I will be away for the next three weeks on a safari in Botswana guided by my son. I will be out of email contact for long periods and unable to respond to queries.)

18 Sep, 2008
Alf Field

321gold Ltd