Gold has not broken through $1000 convincingly yet. And it is short-term overbought so there will likely be a correction soon.

It is possible gold will not undergo a severe correction, as in the C leg down that Ron Rosen has been warning about. Elliot Wave specialists have been going on and on about the C wave in the general market and gold for quite a few months, but it is possible they are wrong. That said, Ron Rosen is not a big Elliot Wave believer, so the fact that he is leaning in that direction is significant.

The thing to watch for here is how gold behaves when it re-traces to the break-out point, namely $960 or so. So far, there has been some exuberance about the triangle break-out to the upside, and that has caused a lot of people to jump in. But those same people could bail in a big hurry if gold goes below the break-out point.

The big commercial traders are probably going to do their best to scare these folks so they can make some money on their sizable short positions. And if the dollar rallies at all, they’ll have the perfect excuse.

But the dollar actually broke through key support at about 77.8 on the dollar Index, and is now hovering around 77. It is possible that is a fake-out to the downside, but so far doesn’t feel that way. We’ll have to watch its behavior closely in the coming days.

My guess is a lot of people are waiting for some bad news to hit the markets, like a big bank failure.  Then the markets would move down in a big way, while the dollar shoots up. Some people are saying gold would also go up this time, like it did in early 2008. Hard to say.

Gold is a safe haven, like short-term US Treasuries, but it got whacked by de-leveraging last October. Maybe most of the de-leveraging fuel has been used up, maybe not. Equities seem to have gotten pretty far in a short period so it would make sense for profit taking to set in. But with some bad news, it could turn into another panic, and then some degree of de-leveraging is probably inevitable.

On the other hand, we may be witnessing the early stages of the inflation bubble and things could just keep moving up. Then the dollar would continue to sink and the big commercial short position could result in an explosive upside move as they frantically cover, and gold could spike to $1300 or $1500 in a big hurry. That kind of spiky top is more typical of gold. There is a large ongoing short position among commercial traders that has been there for years, it’s just that lately it’s gotten quite large.

The commercial traders are not more right than anybody else. But they do have an advantage in terms of manipulating perceptions. Often the sharp drops in gold price are basically due to their manipulation on the floor of the Comex. The intention is to hit obvious stop levels so more selling gets triggered. We are very vulnerable to that kind of action right now. By the way, this is one reason that you should use non-obvious stop levels, and if you want to hold onto a position the stop should be below any obvious support level.

So for example, right now the $960 level is quite obvious. Does that mean you should use $950? Well, first of all it depends on your instrument. The GLD ETF is not exactly the same price as gold spot or futures, so you have to adjust based on that difference. Personally, I would go as low as $919 or so based on gold spot price. Also, try to use non-round numbers.

If prices dip below $960 and a bunch of stops are hit, the price could easily dip down to $930-40. Then the commercials could hammer prices again to cause a real panic and stops could get triggered at $900, causing a further dip. In this situation, a lot of stops may be resting below $900 because that has been the floor in the gold price for most of this year. So if it gets that low, there is potential for a nasty drop. Or maybe the drop will be milder than otherwise at that level because a lot of stops will have moved up to $960.

That’s the kind of thinking that goes into deciding on stop levels. Some positions are for short-term trading and generally stops will be tighter on those. But if you want to hold on through a semi-big decline, then maybe the $830 level is the one to watch. My sense is that below $830 we are looking at the C leg scenario and that might mean $650 or so ($680 would be more likely if the current top does not go higher than $1033 and a C leg unfolds).

But again, things may not pan out that way. I still feel early October will be the right time to evaluate the situation. And in the meantime, sell some now at this current top and see what happens. Jumping in because the price seems to be going higher is foolish. There will be a pull-back or consolidation.

Let’s keep an eye on $960. And of course if the dollar tanks and gold breaks $1000 convincingly, we need to re-evaluate.