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Talking Points

-Gold prices press February highs as Sentiment drops to -1.29

-Elliott Wave Technical Analysis suggests resistance nearby for a fall back towards $1190

-$1167-$1190 is the next level of support to buy the dip

On Friday’s report, we discussed that the medium term trend is higher for gold prices and that we are implementing a buy the dip type of strategy. Sentiment readings over the past couple days are continuing to support a medium term up trend as the SSI reading has continued to drop and now sits at -1.29. This drop in SSI is a result of short positions becoming 8% greater than levels we saw last week while bullish positions are about 9% below levels from last week.

For those not familiar with SSI, it is a contrarian type of signal in that if the reading pushes towards greater negativity, or sellers, then it typically signals a bull move in price.

Gold Price Presses February 11, 2016 High of $1263 per Ounce

Gold Prices Retest the $1263 High

[Image 1]

From a technical perspective, the pattern continues to appear like a 4th wave of a 3rd wave in Elliott Wave terms.

From Friday, we mentioned:

“[T]he first leg lower we saw last week suggests another leg lower of similar magnitude is coming in the next few days. Anywhere between the current level and $1291 could produce a rejection and secondary move lower. Therefore, the zone we’ll anticipate support to buy is $1167-$1190 per ounce.”

Gold prices dropped from $1227 on Friday to $1202 per ounce on Monday which was slightly above the top end of the $1190 price zone. Could it be possible Monday’s price action was the secondary reaction we were looking for? Possibly, but be mindful that it may still be coming. Therefore, the door is still open for a rejection between current levels and $1291 which may lead to a sell off towards $1167-$1190 per ounce.

Based on the current wave count analysis, potential rejection zones surround $1250 and $1281 as a (b) wave of a downward correction (see chart above). Therefore, bulls may want to keep their powder dry for lower levels where the risk to reward ratio improves.

If this is not a (b) wave and if we press higher in circle wave ‘v’, then it would suggest continued modest gains before another retest back into this $1200-$1250 price zone.

The bottom line is that the better risk to reward ratio opportunity for bulls is at lower levels and if price begins to take off higher, the secondary wave count suggests an eventual revisit back to near current levels. Therefore, chasing prices higher is the trade that produces a worse reward based on the risk and that we need to stay away from such chasing. It is preferred to buy the dip near $1167-$1190 per ounce.

Sentiment can provide some clues if the $1250 or $1281 price zones might provide a reaction lower. If the SSI reading begins to shift towards positive levels, then be mindful of the reaction lower. Keep watch on real time SSI which is currently sitting at -1.29.

This past weekend, a date was established for a referendum vote on whether UK’s membership to the European Union would continue for June 23, 2016. This scenario has been dubbed ‘Brexit’ (British Exit) by the news outlets. We bring this up with regards to Gold, because the Brexit was the driving force behind my top trading opportunity in 2016…that is buying Gold while selling Pound Sterling. To read more about that trade, download the 2016 Top Trading Opportunities Guide which includes over 14 different opportunities the DailyFX team is considering in 2016.

Suggested Reading:

Gold Prices Attempting 5 Weeks of Gains (February 19)

GBP/USD – The 8 Year Cycle Revisited (February 24)

Happy Trading!

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

Follow me on Twitter at @JWagnerFXTrader .

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