Gold Elliott Wave: 2016 Rally Was A Fly on the Golden Bull’s Butt

Gold Elliott Wave - 10,000-foot View of a Conservative Wave 3

 

In my reading this week I saw an analyst refer to the 2016 precious metals rally as the “mini-bull"

I was surprised by my gut reaction to the "mini-bull" label – it actually caused me to stop reading for a few minutes while I went and looked at Gold’s price chart

My reaction, I believe, occurred because the descriptive moniker “mini” was being used without any context

 

"Mini" compared to what?

The Gold bull market that I am most interested in is the secular, multi-decade long bull market that Richard Russell referred to in his writings

Keep in mind that Richard witnessed the 2001-to-2011 Golden Bull and was adamant in his newsletters after 2011 that the third and most dramatic phase of Gold's bull market was still in the future - i.e., 2001-to-2011 was NOT the end of the secular bull market that Richard expected in Gold

Richard also pointed out that price, in the third phase of a bull market, often rises to levels that surprise even the staunchest of bulls

Clearly the 2016 rally does not meet Richard's description of a third phase bull market, so referring to it as "mini" is appropriate in that context

 

2016 Gold Rally - A Fly on the Golden Bull's Butt

If we look at the 2016 rally in isolation, it is easy to say, "Holy Etruscan Snoods, Batman! That was one heck of a rally!"

When we back up and intentionally search for the 10,000-foot view, however, we find that the 2016 rally wasn't all that impressive

Notice how the rally failed before even testing horizontal resistance at the prior price peak - that's a sign of weakness

In contrast, look at how Gold is now powering higher and pushing through every resistance level fairly quickly - we're not even getting pullbacks, just brief pauses while the Bull catches his breath

The "Big Bull" has been unleashed and he's on a run!

 

Gold Elliott Wave - General Concepts

I am not an Elliott Wave (EW) practitioner, but I find value in these general EW concepts:

 

  • when price is moving in the direction of the trend, the overall movement tends to occur in a 5-wave pattern

 

  • when price is moving counter-trend, the overall movement tends to occur in a 3-wave pattern

 

After looking at thousands of charts and hundreds of different financial instruments in multiple time frames, I have regularly seen these patterns in play

Now sometimes the 5-wave pattern turns into 7 or 9 waves, but who cares?

As traders, all we need to know is that after wave 5 completes, the probability of price reversing direction increases

The general concept of 5-waves and 3-waves is useful, and we can benefit from applying the concept without getting bogged-down in the weeds worrying about minuette wave iii of sub-wave 4 that truncated because it was part of a larger complex corrective pattern...

In strict EW terms, what I am calling waves 6-through-9 are probably part of some complex corrective pattern, but that is more detail than I care to know about EW

 

Gold Elliott Wave - You Are Here

IMO the 2001-to-2011 rally was the first upward wave of the multi-decade, secular bull market that Richard Russell referred to – let’s call that Wave 1

Bull markets are followed by Bear markets and that's just what happened to Gold from 2011 to late-2015 - this multi-year Bear market represents the second wave, Wave 2, of my expected 5-wave pattern

Obviously Wave 3 comes next, another Bull leg

Since Wave 2 ended in late-2015, it must be Wave 3 that is currently unfolding

And let’s remember that we are talking about Wave 3 in the context of Wave 1 which lasted 10 years, and Wave 2 which lasted 4 years

Wave 3 should be at least as big as Wave 1 in terms of price gain, and it is likely to be similar in duration, if not longer

In our model we are allowing for a shortened Gold Elliott Wave 3 (8 years instead of 10 or more) so we won’t be caught off-guard if that occurs

 

Elliott Wave Theory and Gold’s Secular Bull Market

As a thought exercise, let’s try to fit Richard’s three-phase bull market model into the EW framework

How do the three bull market phases align with the 5-wave EW pattern?

In my first chart I am showing a very conservative Gold Elliott Wave 3

Clearly a price high of $2400 or $2700 is not going to surprise any Gold Bull in today’s market – heck, they’re predicting $12,000 Gold, $22,000 Gold, $55,000 Gold, and even $87,000 Gold!

IMO it will take numbers like $55K and $87K to satisfy Richard’s criteria for “price surprise”

If we dig a little deeper into EW we find that either Wave 3 or Wave 5 is likely to elongate – in commodities, probability favors Wave 5 as the long leg

That suggests that once Wave 3 completes and we have another multi-year Bear Market (Wave 4), Gold will then probe skyward in Wave 5 towards some number that seems ludicrous right now

In my modeling, I am going to assume that the peak of EW Wave 5 and the denouement of Richard’s three-phase bull market will occur together

* denouement: the final part of a play, movie or narrative

 

Fractal Nature of Financial Markets

One of the tenets of EW is that price action is fractal

Within each of the 5 waves I have been referring to, we could zoom in and find smaller-scale patterns of 5 and 3 waves

In my simplified Gold Elliott Wave model, I am counting the 2016 rally as the first wave of a 5-wave movement that will ultimately form Wave 3 of the "Big Bull"

Sidebar on perspective

Take a time-trip back to late-1987 just after Black Monday – imagine trying to convince your brother-in-law that the Dow, trading just above 1600, would be approaching 10,000 in less than 10 years

If the Dow can do 5x in 10 years, why can’t Gold?