The gold market starts 2014 with a bang

Welcome to the New Year! 2014 started off with a bang. And that wonderful fireworks display is beginning to shake the complacency out of many markets. Right from the kick-off yesterday, stocks are under great pressure. This is particularly true for crude oil and, crucially, Dr Copper.

I will cover stocks in due course, but today I will focus on the situation in the gold market. Over the holidays, many were wondering if 2014 will be as dreadful for the gold bulls as was 2013.

The mainstream media are currently full of negative stories of how bad 2013 actually was, suggesting it was a year to forget. Naturally, this tide of negative press has me looking the other way and wondering if 2014 might be a stellar year for precious metals.

A good time to look for a turn

This is one rule I observe: when the media universally comment on a trend that has already occurred, it’s a good time to look for a turn.

We have had well-publicised stories of one prominent gold bull who has been dumping his gold ETFs (exchange-traded funds), saying “I see no reason to be holding gold now”. It is stories like this that often appear at major lows.

I last covered gold on 11 December. At that time, I wondered if it was making a turn. There were some initial signs that the relentless downtrend had at least paused. This was the chart then:

Gold price spread betting chart

I had a good tramline trio and the market was moving up nicely towards my upper tramline following the break of the centre tramline. But the move off the low was looking very much like an A-B-C to that point, which is a corrective pattern to the main downtrend. Also, I was not convinced the Elliott waves (EW) had formed a complete five-wave impulse pattern from which I could infer a trend change.

In fact, the market did top out at the $1,266 level and resumed its downtrend. Interestingly, this $1266 level was a precise Fibonacci 38% retrace of the wave down from the $1,360 high from October (see above chart). The reversal back down at that point was therefore not too surprising.


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Gold comes under pressure when stocks rally

So it was back to the drawing board. I knew the key level was the $1,180 plunge low from June. And with the stock market making fresh highs almost on a daily basis, the downward pressure was likely to force gold down to challenge this area again.

It has been noticeable for some time that when the stock market was in rally mode (that is, most of the time), gold was under pressure.

And this is how the market has played out. Here is the daily chart, and I have drawn two possible EW label interpretations:

Gold price spread betting chart

Last week, the market made a low of $1,182, which could place it at the end of wave 5, or if the wave 4 is really an A wave, within a more complex fourth wave. Then last week’s low could be wave B of an A-B-C.

But under either scenario, we should get a rally – provided the move down from the August high is complete. And that is the question I have had over the holidays (which seems to be answered in the affirmative with this morning’s gains).

One additional factor going for a turn now is the positive-momentum divergence (red bar). This suggests the selling pressure is starting to dry up.

What can the hourly chart reveal?

Yesterday, the market opened up by around $20, which was the first sign that the turn was at hand. And this morning, the rally is being extended.

Gold price spread betting chart

Not only that, but it opened up above the tramline and created an opportunity to take a long position. And note the positive-momentum divergence at Tuesday’s low, which is another bullish signal.

Along with the upper tramline break, my targets are the Fibonacci levels at 38% and then 50%. Of course, higher targets are possible if and when these are reached.

Now, can I count the decline off the $1360 level complete in EW terms? If I can count five clear waves, then that would add to my bullish case.

Gold price spread betting chart

Here are my EW labels and the count is complete. I have a clear five sub-wave pattern within wave 3, and there is the positive-momentum divergence at wave 5.

Identifying a roadmap

If I have identified the low, then what can I expect now? In other words, what is my roadmap? From the chart above, I have a rally which is either in a C wave up or the first wave of a five-wave pattern.

In either case, the most common path is for a wave up, then a down wave and then another higher wave up

Off my wave 5 low, the market has rallied just beyond the Fibonacci 23% retrace level. This could be my first wave up. When this wave ends, I expect a leg down in a wave 2 and then a new rally leg in what could be a wave 3.

Third waves are identifiable by their long and strong nature with momentum readings very high. If I see that, then I know I have a likely third wave operating.

I am therefore on the lookout for a dip from around current levels, then a renewed rally. If that rally is long and strong, it would enable me to call it a third wave, which could reach the Fibonacci 62% level at the $1,290 area.

And with bullish sentiment still at record low levels, the potential is high for the bears to be given a shock. This is because the market is very ‘short’, meaning that speculators on Comex increased their shorts by a whopping factor of four since October. This is setting up the potential for a large short squeeze.

We are a few days past the celebrations of the New Year, but the fireworks are getting even more spectacular!

• 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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3 Responses

  1. 04/01/2014, anne wrote

    dear john, physical demand is up, especially in the east, chinese new year is round the corner. silver may also have hit bottom18.72 for mar.’14. anne

  2. 04/01/2014, Acctsgen wrote

    Happy New Year John.
    Just wanted to say a big thank you once again for your tutoring materials and your market commentary during to week.
    I have been following you for about 3 years now.
    The missing piece of the jigsaw for me was patience. Using your techniques is now supplementing my income with almost 90% successful trades in the past 6 months.
    I made some heavy losses early on because I was impatient and trading on emotion after losses.
    I finally understand and embrace your contrary thinking and the importance of recognising an overpopulated trade inherent in the herding you talk about.
    Ps I managed to get in on a short trade in the EUR:USD, I count 5 waves down in what I think is the start of a major move down.
    Thanks

  3. 05/01/2014, Bronco Bill wrote

    Happy New Year to you John and what looks like could be an exciting and interesting year.
    Gold/Silver and Mining shares at their most oversold levels in history and the S&P500 at the most overbought in history.
    The Dow/Gold ratio is still at an extreme overbought level (now 3months into its 18 month downswing cycle).
    A paper war on Gold is raging here in the west and the media is claiming the end of Gold’s bull run. And yet, the Chinese government is buying all the physical it can lay its hands on and is on tv encouraging its citizens to buy gold.
    Has Gold made what could be a very bullish triple bottom? I dont know, but whatever happens I will stick with the Chinese on this one.

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