The gold price remains in whipsaw mode

Today, I thought I would update the gold story, because it is showing further signs of whipsaw action – and remains very tricky to swing trade.

But I believe the picture is getting a little less cloudy, and that’s what I hope to show you today.

In my 28 July post, I wrote that fourth waves can be very difficult to trade. It is so easy to be whipsawed to death as the waves get smaller and smaller. We have been in a large fourth wave up since making the infamous wave 3 $1,180 low just over a year ago.

Even so, I have managed to take significant profits from the market in the past year – all while the market is trading at the same level it achieved last summer.

While a buy-and-hold investor has made no profit in a year, my swing trades have generated good gains. This is the reason I like to swing trade!

The key to making a profitable swing trade

If there is one key to generating profits by swing trading, it is this: do not to get married to a particular view.

The gold market is rife with people holding firm views where prices are heading. The fundamentalists love to trot out data to support their pre-formed views. Many are very passionate about gold – the metal seems to hold a particularly sensitive spot in people’s emotional make-up.

The gold market is the most emotional market on the board and I maintain that trader sentiment is the dominant factor driving prices. That applies to all markets, of course. But it applies in spades to gold.

In swing trading, we are trying to find the weakness in the lines of support/resistance and then flow along the path of least resistance until it runs out. We want to be bullish when markets start to rise and bearish when markets start to fall.

I realise this attitude can be difficult to adopt if you have come from a stock investing background where you make a rational analysis of the company’s financials and the general economy. When you have decided it is a good investment, you buy – and that is often the time when many others have done the same, and the stock then falls back.

When trading with leverage, you cannot afford to make poorly timed trades such as these!

Here’s what happened to my gold trade

Back to gold and this was the hourly chart last time:

Gold price spread betting chart

I noted the three-wave patterns (and large positive-momentum divergence) and a sensible trade was to go long on the upper tramline break. A protective stop could then be placed just inside the trading channel for a low-risk trade. A possible first target was the red wave b high at the pink bar.


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Let’s see how that trade worked out:

Gold price spread betting chart

The trade went well to start with, but then ran into trouble with the large negative-momentum divergence as a big warning sign that unless the rally could get its skates on, a decline back to the tramline was likely.

And that is where a kiss was made, but we did not get a scalded-cat bounce. The market dribbled on down along the upper tramline and the trade was stopped out for a small loss. My tramlines had failed and that was a whipsaw loss.

When the market could not escape with a vigorous rally, I knew it was time to abandon those tramlines and begin looking for another set. You see, when the market does not perform as you expect (after giving it a reasonable time to perform), it is best to stand aside and just monitor the action.

Can I find new tramlines?

The market did make another low on 31 July at the $1,280 level and has eased back up since then. Can I find new tramlines?

Gold price spread betting chart

These are my longer-term tramlines where the lower line has three accurate and well-spaced touch points. The 31 July low met support on that line and has bounced up smartly off it. My upper line is less secure, but is the best fit.

With the new low of 31 July, is this my new b wave low? If so, we should see a move above the green triangle towards the upper tramline. The market is currently testing that upper triangle line.

What will happen next?

Does the latest commitment of traders (COT) report offer any hints as to what will happen next?

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 374,467
Commitments
188,980 49,827 21,619 126,297 275,229 336,896 346,675 37,571 27,792
Changes from 07/22/14 (Change in open interest: -31,150)
-8,855 -1,862 -9,867 -8,512 -19,771 -27,234 -31,500 -3,916 350
Percent of open in terest for each category of traders
50.5 13.3 5.8 33.7 73.5 90.0 92.6 10.0 7.4
Number of traders in each category (Total traders: 260)
125 67 64 46 54 202 157

 

Up to 29 July, the speculators reduced their long positions somewhat as they reacted to the decline to the lower tramline. But I am unable to glean much of use here.

With the market zigging and zagging, it would not surprise me to see a continuation with no clear direction, although a sharp move up out of the triangle could herald a move to my upper tramline. Then, gold would definitely get very interesting.

• 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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Simon Popple
Metals and Miners


2 Responses

  1. 06/08/2014, ljn wrote

    Hi John,
    Skipper, newby from the Academy here. I’m not exactly an experienced trader, but I have spent some time understanding Elliott Wave theory.
    In the case of Gold I think it helps to start with the wider Elliott picture. Since the June 2013 low gold has been tracing out a corrective five wave triangle wave 4 following completion of wave 3 of the move down from the 2011 high.
    One scenario that could not be discounted is that wave E of the triangle is not yet complete since the July 10 high fell short of what is normally expected of an E wave of a triangle. Now that we have more price data it is more likely that Jul 10 was the end of wave a of E. The price action since that high is a b wave triangle (a-Jul 15, b-Jul 17, c-Jul 24, d-Jul 29, e-Aug 1 with a not unusual overshoot of the triangle. Also that wave e retraced exactly 61.8% of wave a of E. )
    One interpretation is that we are now in wave c of E heading for around the 1350 – 1360 mark. It can also be interpreted that wave 1 of c was on Aug 1, wave 2 ended Aug 5 and we are now in wave 3 of c, certainly judging by today’s strong advance. Wave E may overshoot the wave 4 triangle and be followed by wave 5 down which would complete wave (A) of the correction from the 2011 high.

    Had I been putting the time in last week then I should have recognised the terminating wave e of the triangle on Aug1, hitting the 61.8 Fib, as the low risk entry point. And this is where the price bounced off your lower tramline!! Another confirming factor!

    I’ve only just signed up for the Academy and I plan to put some real time in over the coming days. This shows signs of really coming together!!

    All the best,

    Skipper

  2. 06/08/2014, Bronco Bill wrote

    Looks like Gold on the Daily charts is setting up for a big move John.
    The Bollinger Bands I use are getting very narrow t/w three MA’s which are all more or less touching now…. clustering together.
    As you know this situation is like a coiled spring, and is nearly always resolved with a big move.
    However, you should find Gold “interesting” now John as it closed up today nigh on 19 dollars out of your triangle.

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