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Wednesday, December 21, 2011Gold's Secular Bull Cycles and its ABCD Pattern

I have recently spent a number of weeks writing acomputer script that runs on the Think orSwim platform. The script's output details the 119daily and 30 weekly cycles of gold from its February16, 2001 secular bull genesis to the present. Also, asgold has traded in a continuous repetitive ABCDpattern and is presently completing its 8th iteration of

the pattern, the details of this pattern will be includedin the three charts that follow.

Before we roll up our sleeves and start looking at thecharts I'd like to give you a brief preparatory review ofwhat you will be looking at, then we will be off to thedaily gold futures charts and the colorful signals I

have ascribed to the cycles analysis.

The primary structural component of gold's secularbull price movement is the weekly cycle (also knownas theintermediate cycle). As we will examine in thecharts, this cycle provides the pivot points of theABCD waves and will be easy for you to observe.

The average length of gold's weekly cycle is 94 tradingdays or approximately 4.5 months. Nested within eachweekly cycle are shorter cycles known as the dailycycles. Daily cycles average 24 trading days. And

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interestingly, I have recently discovered a four hourcycle that is nested within each of gold's daily cyclesbut I will write more about that another time.

A cycle is measured from its initial low to asubsequent low that is usually near the expectedaverage cycle length. This measurement is divided inhalf to determine whether the highest price achievedwithin the duration of the cycle occurred before orafter this midpoint calculation. If the cycle's highoccurred afterits midpoint measurement, the cycle isreferred to as right translated. And if the cycle's highoccurred before its midpoint measurement, the cycleis referred to as left translated.

It turns out that this translation issue is a critical pieceto understanding gold's cycles and can be very helpfulwhen anticipating the direction of future pricemovement. This is because cycles that are righttranslated usually make a higher low when theybottom and begin anew whereas cycles that are lefttranslated usually make a lower low. Also, when acycle begins at a certain price and concludes at a lowerprice, the cycle is referred to as 'failed'. This is verycommon for left translated cycles and not so for right

translated cycles.

In gold's secular bull there have been 119 completeddaily cycles of which 39 were left translated and 80right translated. One could generalize that 33% of the

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time gold's daily cycles are left translated and 67% ofthe time right translated. But there is a little more tothe story.

The interspersion of this ratio is not particularlyrandom, fortunately. Indeed, the general tendency isfor a weekly cycle to begin and continue with a seriesof right translated cycles, then conclude with one,perhaps two left translated cycles. For example:

27 of gold's 30 weekly cycles began with a daily cyclethat was right translated. Obviously, buying at thebeginning a new weekly cycle has high odds forsuccess.

On the other hand, 25 of gold's 30 weeklycycles concludedwith a daily cycle that was left

translated. 27 of the 30 weekly cycles concluded witha daily cycle that was failed and 29 of the 30 weeklycycles concluded with either a left translated dailycycle, a failed daily cycle, or both. Obviously, buyingtoward the end of a weekly cycle is a good way to takea position that goes under water quickly and does notrecover for some time.

The ABCD wave pattern is quite straight forward. TheA-wave is usually a sharp rally that follows the severedrop in price that occurs during the profit taking D-wave. The A-wave has been just one or two dailycycles in length, with the exception of the A-wave that

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followed the severe D-wave in 2008. That A-wave was3.5 daily cycles. The B-wave is a corrective move tothe explosive A-wave and has occurred in the form of

either one, two or three daily cycles. The C-wave is thelongest wave in terms of time duration and concludeswith a parabolic finale.

OK - let's get a chart up and see what all this reallylooks like. First we will begin with a look at theearliest years of gold's secular bull, 2001 - 2005.

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The building blocks of gold's repetitive ABCD, theweekly cycles, are located by large upward pointingorange arrows under each weekly cycle low. I chose toplace the abcd identifiers at the beginning of theirrespective wave. Indeed, C-waves conclude with a

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parabolic top, but d-waves also begin at a parabolictop, as well. In any event, I have sequentiallynumbered each C-wave event with a large hot pink

numeral.

The downward pointing large arrows are either darkred (left translated weekly cycle) or dark green (righttranslated weekly cycle). The red and light green dotsspot the precise location and translation of each dailycycle.

I have used a rectangular box to highlight the weeklycycle following each C-wave top. Remember mynoting that there were 30 weekly cycles? Well, what Idid not tell you was that of these, only 7 were lefttranslated. AND, these 7/30 left translated weeklycycles ALL occurred in the weekly cycle following a C-wave top.

Does that sound random to you? It does not soundrandom to me. In fact it sounds rather predictable.

Before we move on to the second chart I would like tocall your attention to the 2002 C-wave top that was

followed by a right translated weekly cycle. That is abit novel. And also notice that the early 2004 C-wavetop was followed by a failed intermediate cycle. Truthbe told, when a cycle that is left translated does notfail - that is bullish. The other rectangles on this chartall dodged the bullet and managed to bottom higher

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than their beginning.

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This second chart shows gold futures price activityfrom 2005 - 2009. Note that the 5th C-wave parabolic

is shown at the conclusion of the first chart and hereat the beginning of this second chart. Please also notethat the 2006 and 2008 C-wave parabolas werefollowed by weekly cycles that were left translated,and that the 2008 specimen, like the early 2004example, was not only left translated but also a failedcycle.

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Which brings us to this final third chart. C-wave top#7 (2008) appears on this chart, as it did in the

previous chart.

What I find curious is our current situation, identifiedby the dark green rectangle. I have temporarilyidentified the bottom achieved last week as theconclusion of the weekly cycle following our recent C-wave top with the large orange upward pointing

arrow. But here is the quandary - it is a righttranslated weekly cycle (dark green, not dark red). Ifthe final daily cycle had persisted for another week orso, then the weekly cycle would have been dark redand left translated. But the recent sell off was sosevere it apparently shortened the most recent dailycycle.

If you recall the first chart, the 2002 C-wave wasfollowed by a right translated (dark greenrectangle/arrow) weekly cycle. But that is the onlytime this has happened. Each and every otherexample following a C-wave top included a lefttranslated (dark red rectangle/arrow) weekly cycle.

Is it possible our current weekly cycle really has notyet bottomed? And that the current daily cycle isgoing to not only be left translated, but also fail andtrade lower than its $1562 beginning? For myself, ifgold does trade below $1562 I will sell sell sell because

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without a doubt in mind we will be heading evenlower. An even more bearish scenario would be forgold to trade a penny below $1535 as that would be

the very definition of a failed weekly cycle. Our twoprevious examples of that (2004 and 2008) should bewarning enough.

I'll be watching my four hour cycles software with akeen eye in the near future as I suspect it will tip meoff should this situation begin to turn on my longpositions. I'll keep you posted.

Good luck and when you figure out how this is goingto turn out before I do, please let me know.

JohntsiTrader@gmail.com

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