How to trade in the Wild West of the markets

The gold market is a heart-breaker. Many hopes are dashed on the seemingly wild swings that punctuate this market. It is the Wild West of the markets.

The price moves seem to bear no relationship with basic supply/demand factors. For instance in 2013, global demand rocketed with especially massive increases in China. Yet the price fell from $1,700 to $1,200 in the year – a drop of 30%. As they say in the US – go figure.

But there are ways to handle these swings – and to profit thereby. Today, I’ll show you how to do so in the gold market by using my tramline trading methods.

Welcome to the wild, wild gold market

Last time I covered gold on 31 March, the market had bounced up from the $1,180 support level to a high of sub-$1,400 in mid-March. Recall that my forecast was for the rally to miss the widely-accepted $1,400 target and then decline.

From this $1,190 high, the market fell steadily back towards my tramline, where it also converged with the 50% Fibonacci retrace. The other major factor was that my C wave was equal to my A wave just in this area. This was my chart then:

Gold price spread betting chart

The positive-momentum divergence put the icing on the cake for a terrific case to be made to cover shorts and go long. But I needed proof that the market would find support there.

This is what I wrote: “One other piece of information: At last week’s low, wave C equals wave A in height. Remember, another common relationship in an A-B-C corrective pattern is the equality of the A and C waves. This is significant.

“So it appears the odds are building up for a bounce from near current levels if my C wave has ended. Not only that, but the latest DSI readings have fallen sharply off the bullish extremes of two weeks ago. This is starting to look interesting!”

And interesting is what it became.


MONEYWEEK TRADER

MoneyWeek Trader is our FREE spread betting & trading email 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:


How I profited in this volatile market

So did the kiss and scalded-cat bounce appear at the $1,280 level?

Gold price spread betting chart

As the market moved up off the $1,280 low, I was able to draw a terrific tramline trio. The centre tramline has a good PPP (prior pivot point) and four accurate touch points. This makes it a very reliable line of support/resistance.

But the support/resistance line (marked in pink) is the significant level for trade timing purposes. If the market could move up through this resistance, it would then be transformed into support.

And if the market could punch up through my centre tramline, that too would become a support level. And with this enhanced support, a decent rally was on the cards.

There were thus two places to set stop-and-reverse orders for short trades: the break of the pink bar and then the break of the centre tramline. Protective stops could then be entered just below either line for a low-risk long trade.

With a budding rally in progress, my next step was to apply my Fibonacci levels to the most recent wave down:

Gold price spread betting chart

My first target was the Fibonacci 38% level where I determined to take partial profits using my split-bet strategy. And last Thursday, this level was hit and I duly took profits on one half of my long position for a tidy $30 profit.

I left the remaining half position open but moved my protective stop on it up to the $1,300 level. I chose this level because I wanted to give the market a little room to digest its recent gains – and I am glad that I did because yesterday the market fell heavily, taking me out at my stop for a total profit of $35 on the trade.

Waiting for the dust to settle

This is the picture this morning:

Gold price spread betting chart

The sharp decline yesterday was not a total surprise to me, because the rally had been contained within the trading channel. It was a series of overlapping waves, which is characteristic of a corrective move, not an impulsive one.

An impulsive move would contain at least one very sharp rally which would not be retraced by a large correction. There were none in this rally.

Note the very oversold momentum reading at the spike low. This is a sign of a wash-out and heralds a recovery of some sort.

But there has been much damage done to the bulls’ case – and confidence!

Now I am out of the market and looking for a new trade. I have found from bitter experience that the best policy following a shock to the market is to stay out until the dust settles – and that could be days away.

Lawlessness abounds in the gold market

Where are we in the bigger picture?

Gold price spread betting chart

These are my Elliot waves that I have drawn previously. The market seems to be tracing out a large triangle. My C wave may possibly be in place at the mid-March sub-$1,400 high and the market may be working down from there.

But another possibility is that after one more dip (in an A-B-C off the sub-$1,400 high), the market may stage another rally attempt. In this case, the C wave and wave 4 (red) may lie closer to the $1,400 level before turning down in a wave 5. This would take the market down below the $1,180 support.

In the Wild West, there was little law and order!

• 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. [xyz_lbx_custom_shortcode id=11]

 

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

3 Responses

  1. 16/04/2014, kajoda1954 wrote

    Ha Ha John. You know very well gold is being leaned on. I am not in the slightest a gold bug but is plain even to me. Tell you what though I do have some gold and I would bet that in 5 years I will be smiling and holders of printed paper will not be so ecstatic

  2. 17/04/2014, Bronco Bill wrote

    Couldn’t agree more kajoda1954.
    Enquiries are ongoing by by regulatory authorities in Germany and here in the UK into possible price manipulation by bullion banks in connection with the London Fix mechanism for gold.
    Since 1999 the Dow has fallen 72% against gold and looks like now ending its small dead-cat bounce and is now set to resume Dow down…..Gold up over the coming months.
    It will be of no surprise to one day see the Dow/Gold ratio at 1/1 or below.
    I have not held the physical stuff since 1999 and seen it as a trade.
    I have hoped to preserve some purchasing power…..so far, so good.

  3. 18/04/2014, Bronco Bill wrote

    I’m surprised that more people dont comment on your stuff John, so just for the hell of it I’ll have another go.
    You say that “The gold market is a heart-breaker” and that “Many hopes are dashed” etc.
    Have you forgotten allready what Mr Partridge was telling Elmer ” Well you know this is a bull market” he really meant to say that the big money was not in individual fluctuations but in the main movements that is, not in reading the tape (charts today) but in sizing up the entire market and its trend.
    As I dont trade gold but have been buying physical since 1999 I’m listening to ol’ Turkey and not losing my position on daily and weekly fluctuations with all thats going on in the world.
    These wild swing days for the Dow, Gold etc is common and to be exspected just before trends (usually) change direction.
    Batten down the hatches, seat belts on may be prudent this year, as the decades long Elliot Waves look interesting and the Kress 120 year Grand Super Cycle is bottoming, and now into the mix is the Blood-Red Moon this year.
    If you wear a hat John, you may want to hold on to it.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Hard cash

What's next for gold and silver?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking