The gold price is getting closer to my target

Gold is at a crossroads. In my post of 20 June, I showed that the previous week’s big rally was a short squeeze and moved the market up to the $1,320 area, which is at a major tramline target:

Gold price spread betting chart

I forecast back then that I expected stiff resistance here – and the market has duly obliged by barely budging for the past six trading days.

So today, I thought I would discuss where I think gold is heading next.

The market recognises Fibonacci levels

Here is a close-up of the latest action:

Gold price spread betting chart

I have drawn the Fibonacci levels using the most recent low and high as pivot points. I chose the bottom low of 5 June instead of the second low of 6 June (which is a possibility), because the intervening highs and lows make very accurate hits on the various Fibonacci levels.

For instance, the first rally reversed right at the 50% level and then the subsequent dip was held at precisely the 23% level (the arrows). At these points, the market had not made its final high, so how did the market ‘know’ to reverse at these Fibonacci levels?

What I think will happen next

Note that last week’s three dips have been contained by the 23% level with high accuracy. But the market has hit an important tramline of resistance – and daily momentum is running at overbought levels.

If the market cannot punch up through this tramline very soon, it may well reverse course and move down through this Fibonacci support. If it did that, then that would set up a very interesting Elliott wave (EW) possibility:

Gold price spread betting chart

Here are my established EW labels. Now if the market retreats from here, I can call that wave a up. A decline here would be a new wave b, which would lead to a new rally to make a high above wave a in wave c, which would correspond to my E wave.

So that is my best guess at present. If this pans out, where should the b wave turn?

Gold price spread betting chart

Here is my best guess on the hourly chart. I have a suggested tramline pair. The upper tramline already has two excellent PPPs (prior pivot points) and two accurate touch points, making it a very reliable line of resistance.

The lower line is the tentative one, but if the market can dip to the Fibonacci 50% level – a common retracement – then it would meet the lower tramline support this coming week.

That should be the b wave, leading to a new high in wave c. A long trade at the b wave low would make sense.

But is there any evidence that this is a realistic scenario?


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Why gold is the most emotional market

Here is the latest COT (commitments of traders) data from Friday, and it carries a health warning – it’s a shocker:

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 392,388
Commitments
183,433 62,574 24,959 142,864 274,471 351,256 362,004 41,132 30,384
Changes from 06/17/14 (Change in open interest: 12,545)
21,381 -21,183 -1,172 -14,159 39,123 6,050 16,768 6,495 -4,223
Percent of open in terest for each category of traders
46.7 15.9 6.4 36.4 69.9 89.5 92.3 10.5 7.7
Number of traders in each category (Total traders: 276)
128 72 66 52 55 208 167

 

Starting at the week’s changes Tuesday to Tuesday, the hedgies (non-commercials) have swung massively behind the rally. In the previous week, they were roughly two-to-one bullish and in one week, they have reduced their shorts and increased their longs to where they are now three-to-one bullish – a massive 50% increase in bullish commitment.

In a similar vein, the small traders have also jumped on the bull’s bandwagon.

But note how the commercials (the smart money) have taken the other side and are now two-to-one bearish.

These swings are huge – and have forced the $60 rally in that period. Do you remember back in December, when the Daily Sentiment Index (DSI) was plumbing new depths of bullish sentiment of 4%?

Now you can see why these immense swings in sentiment are the reason I call the gold market the most emotional on the board.

Incidentally, it is a similar picture in silver, which I mentioned last time.

How long will the party last?

With this huge swing to the bullish camp, will this be enough ammunition to fire the market down in my b wave, as the new longs may have over-extended themselves short-term? That would be a typical market punishment to trend-followers who arrive late to the party.

Of course, the alternative scenario is for the market to continue its rally and to head up towards the old high at the $1,400 level. But I consider that less likely, because of what the COT data is telling me.

However, there is a recent precedent for this. In my third chart above, the big C wave rally made a very overbought momentum reading in mid-February, but the market still climbed higher into March. Just because momentum is high does not always mean the move is very close to exhaustion.

Another factor is the Damascene conversion of many bearish pundits in recent days – just read the many wildly bullish forecasts coming out of the woodwork.

In the highly emotional gold market, often all it takes is a small rally to get the bulls excited!

• 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

• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.

 

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How to buy gold in 2014

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Metals and Miners


  • anne

    Dear John, gld just broke thru the sideways 1310-1320 and is presently trading around 1325-1328 . So the target of 1390-1400 may indeed be possible. May even be possible to breakthrough 1400, given the right conditions. anne

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