Gold hits another target – again

When I last covered gold on Monday, I noted the five-wave move down off the November $1,750 high which signalled a resumption of the bear market.

From the early December $1,680 lows, the market then embarked on the fully-expected counter-trend rally.

The challenge for swing traders in these situations is simple: where will the market turn from this rally so that new short trades at low risk can be entered?

Do I have a trade?

Let’s look at the picture since December.

I had my excellent tramlines in place – and the Fibonacci retrace levels.

My methods say that if I can see an A-B-C formation on this rally leg, then I have a trade!

Gold price spread betting chart

(Click on the chart for a larger version)

And on Monday, I wrote: “So I have placed my upper tramline (purple) equidistant from that one – and that is my next target. As it happens, it crosses the Fibonacci 50% level in the $1,720 area, making this an important resistance area.

“If the market reaches it, I will be looking to re-establish shorts again and ride the next wave down. Remember, my analysis says that we are in a large third wave down”.

That was my upper target – at the $1,720 level.

And this is the picture this morning:

Gold spread betting chart

(Click on the chart for a larger version)

The market rallied in an A-B-C (green bars) to make a direct hit on my target zone – the rally being prompted by the initial reaction to the Fed announcement for more QE.

Trader tip: When there is a date and time-certain event approaching (such as the much-anticipated Fed news), the market will often move strongly into it. As the news is released, the move is often extended. This is an ideal opportunity to ‘fade’ the move. Fading means taking an opposite stance to that of the move. In this case, there was a rally to be shorted into.

As occurred, the move was a false one and the market sank heavily within minutes. Protective buy stops can then be placed just above the spike top, as a rally beyond it would almost certainly catch the shorts on the hop – and larger gains would be expected from the huge waves of short-covering. That spike top is a very important point.

Could gold rally above $1,720?

That was the end of the rally – at least for now. The market has moved down to the $1,690 – $1,700 zone where support has emerged – and this is why:

Gold spread betting chart

(Click on the chart for a larger version)

Taking the rally off the low to the $1,723 high, I plot the Fibonacci levels of this wave up. Right away, the decline stopped at the Fibonacci 76% level – a common stopping point and where short-term profits can be taken for a nice gain of over 200 pips, or £200-plus per £1 bet.

Now, this sets up an interesting possibility. If the rally off the $1,680 low has not yet completed, and the large wave 3 down move is not yet ready to launch, we could see a rally from here to extend above $1,720 in this fashion:

Gold spread betting chart

(Click on the chart for a larger version)

If this plays out, a good target would be the $1,730 area, the Fibonacci 62% level. There would be a larger A-B-C move, of course.

As I never tire of saying, forecasting is all about probability estimating. What is the relative likelihood of this scenario playing out compared with a resumption of the downtrend?

If we assume the probabilities are about even (without further evidence), then if you were tending towards a long trade, you would do a cost/benefit analysis along the following lines:

If I entered long here at $1,697, I could place my protective stop at $1,687, just under the recent low (a move there would certainly place the first scenario much more likely, and you could reverse your stance to short).  That would be a $10 risk.

The potential reward? If wave C ends around the $1,730 area, that would indicate a potential profit of $30 or so. This would give the trade a reward/risk ratio of better than three-to-one. This is a very decent result and many traders would take it.

But if you were bearish and believed the market is back on its declining track, would you enter a short trade here – and if so, where would you place stops?

Hint: Find your tramlines first, if any.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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  • Martin Pike

    There is another scenario which I have been working to which is that the October top was only the top of a third Elliot wave up. To make it a wave 5 top is to contrive the Elliot Wave. The movement since then is an ABC to the Early November low followed by the begining of the fifth wave up which has taken the form of a fractual Wave 1 and an ABC correction to the early December low you show above as the beginning of your ABC. That would make the movement since then as the beginning of Wave 3 up. Your enlarged ABC would then confirm that move. I expect you are correct and my assessment is wrong but perhaps in another e-mail you could explain why your scenario is more probable?

  • Chris

    A big thank you again John for sharing your trading techniques. I love looking for new channels and using the Fib levels along with price and strength divergences have found these to be very successful. I sometimes get paranoid in thinking that these techniques surely can’t be that easy to use as everyone would be doing it. But by following the techniques, I am starting to really understand the principles. I have made a few losses but I am currently on a nice profit on the Dow & Gold (both short trades).

  • Chris – continued from above

    I have a support line down at around the 1675 mark for gold which is my next target and a potential long trade as I think the market will really hard from there. I suspect that Martin could be right and we are in a larger reaction(wave C) of a big move up, although as we are only seemingly in wave 3 the downside could be played out over a few more weeks. However, you have long believed that we are in a deflationary spiral and it wouldnt take much for panic to spread and we could see huge waves of sellingin the future

  • Puzzled of East Sheen

    John
    I’ve been following these Gold moves closely over the last few weeks and noticed the spike up to 1723 as it happened on the 12th Dec. However, what made you think it would then turn? You had previously referred to a target around 1720 at the intersection of your down sloping tramline on the hourly chart and the 50% retrace from the 23rd Nov high to the 7th Dec low, which seemedto me a good target. But at around 6 pm on 12th Dec the gold price, at 1723, had broken through those resistance lines so an extension of gains seemed on the cards. I was not confident to go short and decided to stay out of the market. You later suggest that the spike was an overraction to the Fed’s announcement but this seems risky as 2 of your rules (tramlines and Fib levels) had been breached. You either have these rules or not, don’t you? It feels rather like you modify them in retrospect to fit the circumstances?
    I’d be interested in your take on this but thanks for your emails
    Puzzled.

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