Sunday, August 14, 2011

Gold C-wave Tops and D-wave Retracements

This morning I decided to do a little more work on my previous explorations of gold's C-wave tops and D-wave retracements. The question for today was two fold. First, what was the maximum Fibonacci retracement of each D-wave and second, how many trading days did it take? Once into the calculations I decided to also figure out how many trading days it took for the D-wave retracement to reach the first couple of significant Fibonacci measurements - 38.2 and 50% - of the corrective D-wave's fall to a final bottom.
Before I show you what the data revealed, I should remind readers I believe gold trades in an ABCD wave pattern.

The A-wave is a bullish wave that often recovers more than 50% of the bearish D-wave. This wave will not surpass the height of the preceding C-wave.

The B-wave is a corrective wave that unwinds the bullish sentiment of the A-wave and prepares for the biggest wave, the C-wave. The low achieved by the B-wave will not surpass the low acheived by the preceding D-wave.

The C-wave is the longest wave in terms of time duration and characteristically concludes with a parabolic price blow off that brings us to the harshly corrective D-wave.

The D-wave, our study for today, retraces a minimum of 50% of the C-wave. It is a profit taking event that unwinds the excessive bullish sentiment achieved by the C-wave and reverts price back to, or just below, the mean (200 dma). And, the primary price trend line of the preceding C-wave will be broken to the downside by the D-wave.

Since the beginning of gold's secular bull market in 2001, gold has completed this ABCD pattern 6 times and we are currently in the 7th occurrence.  You may read additional details of my research of this pattern here and also, here.

Let's now revisit the previous C-wave tops and examine the size of the D-wave retracements and their speed as measured in trading days.
The first C wave top occurred in 2002. Within just 8 trading days the entire C-wave had been retraced by both 38.2% and 50%.  On Day 25, this first D-wave concluded with a retracement measuring 61.8%.

The second C-wave topped in February of 2003. The D-wave that followed retraced 38.2% in just 5 trading days and fully 50% one day thereafter.  By the time this D-wave bottomed, the retracement amounted to a whopping 86% and needed 41 days to accomplish.

The third C-wave added a uniquely new feature to the ABCD pattern, with the C-wave double top. From the second top the retracement to the 38.2% level was accomplished in 8 trading days, the 50% level reached in 19 days and the entire D-wave bottom concluded with a 67% retracement that took 26 days.

The fourth C-wave top occurred later in the same year - 2004 - in early December. The 38.2% retracement was reached at shocking speed - just 3 days. This was followed by the slowest decent to the 50% retracement thus far - a modest 20 trading days. This D-wave concluded with a 74% retracement and took 44 days to reach.

The fifth C-wave parabolic top was reached in May 2006. After a couple days this D-wave made an attempt to regain the highs and closed impressively positive on the third day. But it was for naught. Like a rock climber losing his grip, price plummeted quickly and reached the 38.2% retracement on Day 21. On Day 23 price bounced off the 200 dma, completing the smallest retracement of any preceding D-wave - just 54%.

The sixth C-wave topped in March of 2008 at a price of $1,030. A retracement of 38.2% was swiftly recorded on Day 9. Some zigging and zagging ensued but by Day 32 a full 50% retracement was in place. Over the following 3 months gold rallied very strongly and appeared to have been making a new A-wave of the familiar ABCD pattern. And it had also made an inverted head & shoulders pattern and things seemed to be looking just great.  At the time I would have been tempted to think gold was going to the moon and right away!

But nooooooo......  Gold began falling in mid-July and reached the 61.8% retracement level in a matter of 3 weeks on Day 101 of its D-wave. By latter September/October the deflationary environment began to take every asset class down and suck them all into its dark hole. Gold swiftly plummeted well over $200 and reached its final D-wave retracement bottom on Day 152 - having retraced fully 89% of its C-wave.

Before we move on, let's recap what has been observed (2002 - 2008) so far.

6 C-wave tops to date.

Minimum retracement was 54% (2006)
Maximum retracement was 89% (2008)
The other retracements were 61.8%, 67%, 74% and 86%

Minium trading days to reach 38.2% retracement: 3 (2004 late)  
Maximum trading days to reach 38.2% retracement: 21 (2006)
The other 38.2% retracements occurred on Day 5, 8, 8 and 10

Minium trading days to reach 50% retracement: 6 (2003)
Maximum trading days to reach 50% retracement: 32 (2008)
The other 50% retracements occurred on Day 8, 19, 20 and 23

Shortest D-wave duration: 23 trading days (2006)
Longest D-wave duration: 152 trading days (2008)
The other D-waves were of durations: 25, 26, 41 and 44

If we throw out the data that is at one extreme or another, this leaves us with the observation that a 'normal' D-wave usually retraces about 61.8% of its preceding C-wave. It reaches a 38.2% retracement in around 10 trading days, a 50% retracement in around 20 trading days and its final bottom in around 35 days.

Finally, let's take a look at the current C-wave and see how these general observations may apply.
The current C-wave was born on April 6, 2009 at $865.  The highest price achieved by this C-wave to date was $1,817 and reached just last week on August 11, 2011.
Although it is too early to know 'for sure' whether this C-wave has topped and the dreaded D-wave has begun, in my mind it is a distinct possibility.
If we have indeed just witnessed the C-wave top, then we can use our general observations to hypothesize where gold may go from here.
It would be stastically reasonable to deduce that gold could now reach the 38.2% retracement level sometime during the 4th week in August ($1450ish) and reach the 50% retracement level in a matter of 20 total trading days which would be near Friday September 9 and at a price level around $1341.
Further, a conclusion of the D-wave suggests a 35 trading day total that would land around Friday September 30 and render a 61.8% retracement near $1229. This price level, coincidentally, is the same as the high achieved in December 2009.
However, the plot thickens when we add to these observations what we also have observed about D-wave retracements. Namely, that the price trend line of the C-wave must be broken if we are in a D-wave and the price level of gold's 200 dma is a very common concluding landmark of D-wave corrections.

It turns out that both the current C-wave trend line and gold's 200 dma project to about $1500 around the end of this month, August. This would amount to a scant retracement of just 33%. If $1500 holds this will strongly suggest to me that this C-wave is still alive and kicking higher.

A failure at $1500 should see price collapse next to the 50% retracement level $1341. If this turns out to be the case I would expect this D-wave to conclude (bottom) at that point. My expectation is milder than the generalized hypothesis in italics above.

The primary reason I think this is because $1341 would be more than sufficiently below the 200 dma, the 50% retracement 'prerequisite' would have been met, as in 2006, and there is every fundamental reason in the world to believe that gold is going much much higher.

The only catch in my mind is whether deflation gets a grip on the world, ala 2008. If so, all bets are off. Let's all hope that does not happen.

Anyway, for now we will have to wait to find out whether gold's C-wave has peaked, or not.


  1. John,
    Thanks again for your analysis. If gold does indeed go down to anywhere near the 38.2% levels and lower, I think a lot of "we fixed the economy" type of market surges will be occurring. Maybe that is the reason QE3 is being held back.
    Then again, what do I know?

  2. Fabulous work John!!!! Before you disclosed what your teaching subject was I was guessing mathematics.
    Just want you to know that I am now at Smartmoney as a subscriber cause of your service here.
    I look forward each day to your analysis and must say I have so so much to learn through you and Gary.


  3. MrM - also then again, what do I know? There are a lot of educated guesses we must take to get any kind of edge in the markets....but no one can know what will happen next, for certain.

    Crackor - compliment appreciated. It took me the better part of two days to write that post - as much of it was hassling with blogger to get things to either save or format correctly on the screen display as the actual making of charts and writing. I am very pleased to know you have subscribed at Smartmoney. I so have a minor to teach math, for what it's worth. :)

  4. just beautiful analysis John :)

  5. John, I too would like to thank you for your work here. I've been following your blog about six months now and I can't tell you how valuable it has been to me.

  6. Anon and Steven - thank you for expressing your appreciation. I get these ideas in my head and then I can't stand it until I get to the answer, or at least to the end of the trail where the forest begins.

    Honestly, every thing I write is about something I want to understand better - for my sake.

    But secondarily, I am pleased that the additional time I invest to share where my imagination has taken me can be useful to others. The day this is no longer true is the day I should just spend more time doing something else enjoyable and give this blog a rest.

    The traders were very clever to leave everything on Friday afternoon right butt up against resistance trend lines - and let these Asian traders try their hand at the markets this evening.

    So far gold is trying its best to get up through a down sloping price trend line. At the moment I see it has actually broken out by a couple bucks but the TSI says this break out will fail.

    Meanwhile, the S&P has hit its head on an overhead resistance line at least 6 or 7 times in the past 20 hours. At some point you just know that is going to break to the upside.

    And the US Dollar is playing possum - sitting dead center inside a wedge and not showing any cards.

    The markets are endless entertainment.

  7. Hi John,
    I have been a follower of your blog for sometime now, and I should say I am impressed by your analysis. I need your advise - I have 1 Kilo gold @ $1280 and 20 Kilos of Silver @ $31. Should I stay long or should I sell now and book my profit and buy again after this D Wave.

  8. Hi Tracy - well, far be it for me to advise you on how to handle your excellent position holding both gold and silver at a gain.

    Instead I will tell you how I handled a similar situation of my own. My wife and I bought gold bullion at $880 and silver bullion at $14. The other day we decided to sell half of the gold back to Kitco for $1787 and keep the silver entirely. Our thinking was that we had a nice gain and wanted to take some profit on the chance the market indeed goes into a D-wave correction, but continue to hold a substantial amount as a long term investment. Owning bullion, for us anyway, is just enough of a hassle that it lends itself well as a buy and hold investment - not a trade.

    The D-wave, as I have written, is a profit-taking reversion to the mean (200 dma) event. It is NOT a 'gold's fundamentals are broken' event. (ie - we absolutely believe in gold and silver!) This somewhat explains why the commercial traders were heavy sellers into the recent parabolic move. Price starts to go crazy, there are lots of anxious buyers and it's an opportune time to be a seller. Just the opposite of the way the public thinks about things.

    At this time there is the overwhelming sentiment that the fundamentals for gold have never looked better. My experience has been that when everyone thinks the same thing, no one is thinking. Usually when things look their best it is about to change and leave a lot of folks wondering 'what happened'?

    Tracy, I have no advise, but I have shared with you my thoughts. Basically I think you are in a no-lose position, whether you hold or sell.

  9. Thank you John,
    I can understand, predicting such markets is not easy. I just can't seem to make a decision on what to do. Thanks anyways for your advise.

  10. Very thoughtful post John. There's another little hint you may be right. Check out the volume levels on GLD on a weekly chart. Volume spikes like the one we just had often precede or foretell a correction is coming. Will it be more than a "correction"? Only the shadow knows. Thanks for your work. My only regret is that you'll be heading back to the classroom shortly.


  11. Won't the later stages of the gold bull market cause the d-waves to be shorter in duration and less in magnitude? For instance as the NASDAQ accelerated into it's mania stage the pullbacks became tiny compared to the earlier phases.

  12. Hi John, Are you looking for a break in the trendline to confirm that the D-wave has started? Would a double top here also be confirmation of that signal?

    Thanks for the charts and analysis. Really great stuff!

  13. Jim - I use the VolumeFlowIndex indicator at ThinkorSwim and somewhat swear by it. It peaked July 14 and has been making unimpressive lower highs in the 4 weeks since then. I would think gold appears to be about out of gas in the tank.

    Anon - that's an excellent question, one that I ponder from time to time. I would love to see someone define the mathematical equation of gold's parabola from 2001 forward. My hunch is that would give us an excellent tool to determine when price movement has moved too far too fast. It could also be very useful in defining likely future price at any future time.

    lix - a break in the trendline of the C-wave would confirm that the D-wave is game on, but that would be really late confirmation - as the current location is at $1500 - nearly $300 lower.

    A double top probably would not 100% convince me.

    I do think that if this intermediate cycle low at $1478 is taken out to the downside, that would convince me.

    In the meantime I just watch the TSI which, for now, says gold has a chance to make a higher closing high ($1797+) but not much chance of going much higher before falling hard. We shall see.

  14. Nice compendium of prior D-Wave declines. After reading a previous post of yours and this one I really started salivating about a short position in gold. There are a couple of exogenous events that could crush gold here:

    1) Deflation takes hold
    2) Europe gets its together

    Everything will get crushed if the first one happens, but there's a good chance gold will take a hit if the second one happens while stocks explode to the upside.

    In the case where Europe gets it together though, the Euro would skyrocket and the dollar would get crushed, in which case it's hard to say for sure what would happen to gold, but I still lean toward a sell off.

    The other exogenous event that could happen and would be gold positive is if Bernanke prints. Jackson Hole is coming up in less than two weeks and it's kind of fighting the Fed to initiate a short position right now. There's no guarantee gold would go up though, because it would be "risk on" and gold could still get sold off for stocks.

    What really gives me pause about a gold correction here is seasonality. Gold is extremely strong in September. Looking at your charts, it appears the only time gold corrected in the September time frame was in 2008. It came down hard in July-August, bounced, then would have bottomed in September had it not been for deflation.

    So maybe a short position isn't off the table for me, but if not that means gold needs to start coming down fast and furious between now and the end of the month. It also means that the crash should be bought hand over fist as there would likely be an upside explosion in September, possibly the A-Wave?

    Maybe it's like Gary says and the outcome of events doesn't necessarily matter that much, but rather the gold market is going to use whatever excuse necessary to do what it wants to do anyway. In which case that would favor a decline. Of course, he also says never short a bull market ;)

  15. Flaunt - you express yourself exceptionally well and I enjoyed reading your thoughts. You pose a number of very possible scenarios and I agreed with your last paragraph - gold will do whatever it wants while others will assign some excuse for it.

    The selling on strength data, the most recent COT report, my own little studies on volume flow which show that volume has been unmistakenly retreating for many weeks now, blah blah, and now the attempt to get price back above $1800 one last time to unload on the dummies, tell me, along with the TSI, to be very very wary of gold going much higher.

    Yes, it would be possible for the D-wave to be over in latter September - at least that is what my research for this article suggests (23, 25, and 26 trading days in 3 previous D-waves, anyway).

    The A-wave, when it arrives, makes up a lot of ground very fast but never takes out the top of the preceding C-wave. So if $1817 is indeed the C-wave top, it would NOT be reasonable to see gold above $1817 for months and months - certainly not this fall.

    New Post:

  16. Is there any charting software out there that will plot future technical readings (e.g. MACD, SMA, TSI) if you give it an anticipated price path?