by Poly, Zentrader
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The recent midweek report highlighted a technical pattern that frequently occurs during Gold’s Daily Cycle declines – a step pattern of 3 sessions down followed by 3 days of sideways consolidation. The pattern is repeated as Gold falls into its DCL (Daily Cycle Low), with the final 3 day drop marked by broad capitulation and panic.
Gold’s recent move toward a DCL has generally followed this pattern, but I’m concerned that the last 3 day burst down was, by DCL standards, fairly mild. Technically, Tuesday’s low qualifies as a DCL. The lower Bollinger Band was touched and the RSI was oversold. But since we’re also looking for this Cycle to mark a much deeper Investor Cycle Low (ICL), we would expect broader capitulation and deeper technical damage.
To satisfy my expectation of an ICL in the $1,210-$1220 area, Gold will need to endure yet another, more violent, step-down decline. A final drop is needed to wash out the remaining bullish sentiment and to push the weekly Investor Cycle down into a more recognizable Cycle Low. Because the Cycle is already 24 days in and price has churned sideways for 3 days (a bear flag), the final 3 day down move should begin almost immediately.
The above these leaves room for doubt, however. In a modest departure from the primary expectation, I’m starting to reconsider the possibility that we might have another Daily Cycle ahead of us – the current Investor Cycle simply doesn’t yet show the normal signs of an ICL. Gold’s next move should provide clarity. If Gold immediately drops to retest the June lows in the $1,220 range, we can mark the drop as a both a DCL and an ICL, although the ICL drop will have been fairly mild.
On the other hand, if Gold moves higher next week, Gold bugs should be fearful. With Gold at 25 days from the last DCL, a move higher through the 10dma ($1,294) and the declining trend-line will confirm that a new Daily Cycle is in play. On the surface, a new DCL is bullish, and many investors will interpret and trade it as such. But a new Daily Cycle will likely be the 5th in the current Investor Cycle, so should fail and lead to significant low. To avoid the downside that a 5th Daily Cycle would bring, the current 4th Daily Cycle needs to show a rapid $80 decline in Gold’s price. Though nothing is certain, such an immediate drop will dramatically increases the odds of a DCL which also marks an ICL.