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:
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:
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?
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?
MoneyWeek Trader is our FREE spread betting & trading e-mail offering you the very best tips, secrets and guidance from our trading expert, John Burford, who has years of first-hand experience.
To start receiving John's emails three times a week , plus occasional promotions), enter your email address below:
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:
|(Contracts of 100 troy ounces)||Open interest: 392,388|
|Changes from 06/17/14 (Change in open interest: 12,545)|
|Percent of open in terest for each category of traders|
|Number of traders in each category (Total traders: 276)|
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.
performance is not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.