Occasionally, I get some grief about the 6-month cycle and how it doesn’t work. Granted, it isn’t perfect…some cycles run short while others extend, but for the most part, it’s a useful timing tool. And if measured correctly, can provide a profitable trading strategy.
So what went wrong with this most recent cycle? Frankly, it stretched much longer and corrected way deeper than I ever envisioned. As an analyst, I attempt to put the odds in our favor. The odds were high (95%) that prices would bottom between weeks 20 and 26. The average duration (mean) is 23-weeks. The $1,281 low manifested during the 23rd week, and statistically speaking should have been the cycle low. However, prices broke lower after the ECB announced tapering and the cycle extended. I believe big money used this opportunity to run stops and flushed the weak players out of the market.
THE 6-MONTH GOLD CYCLE: As you can see, the 6-Month gold cycle lasts anywhere from 18-30 weeks. To calculate the most likely timing window for a low, I use standard deviations. Into the most recent period, the mean was 23.3 weeks. Standard deviations recommended a 95% chance of a low arriving between weeks 20 and 26, and there was a 99.9% chance gold would bottom between weeks 18 and 28. Consequently, the probabilities of this cycle continuing for 29-weeks was less than 1%. Nevertheless, prices likely bottomed this week (29), and we should begin a new 6-Month cycle advance.
5-YEAR BASING FORMATION: The 5-Year basing pattern remains whole and the recent decline likely bottomed just above the 200-week MA. Prices should advance back towards the $1370 breakout zone. Remember, the larger the base, the more meaningful the breakout. Gold has been working on this basing pattern for 5-years. I expect a breakout above $1370 later this year to confirm a new bull market. Breaking sharply above $1370 will be incredibly bullish and put the gold bears back into hibernation.
It’s unwise to become overly bullish or to get married to a particular outcome. I do however think gold is headed much higher and that the recent setback was fleeting. Nevertheless, I would dampen my expectations if gold fails to advance back toward the $1370 breakout level in the coming weeks/months. My analysis will change to bearish if prices descend and remain significantly below the 200-week MA ($1235).