Now the gold price is following my script

Last Friday, I made a case for a decent rally in gold off the 31 December $1,182 low. This was based on my analysis of the Elliott waves and the record low bullish sentiment. I also referred to my tramline signal on the hourly chart.

One of the most overused myths of trading is this: never try to pick tops and bottoms. This is basically a warning to only trade with the trend.

But I say this: a trend has to start somewhere, so why not try to get in at the earliest possible opportunity? That way, you stand a chance of making a really big profit. And that’s not a bad thing, is it?

After all, there is no use in jumping on a tiring trend when its direction is already obvious to every trader and his dog. That is when surprises are most likely to occur. And you will have committed the sin of sins by joining the herd!

The benefit of using tramlines, Elliott waves and Fibonacci levels

Being able to confidently detect trend changes early in the game is a terrific benefit of using the simple principles of tramlines, Elliott waves and Fibonacci levels.

You see, when a trend is undergoing a change in direction, most traders are on the wrong side of the market; sometimes by an overwhelming majority. The COT (commitment of traders) data can help identify these situations.

For instance, the futures holdings of speculators versus commercials in the Nasdaq has recently hit an 11 to one ratio of bulls to bears. My eyes nearly popped out when I saw this because that’s probably the most extreme lopsidedness that I can recall in any market.

This places the Nasdaq in a very vulnerable situation. That’s because a small reversal from the solid uptrend is likely to turn into a major rout. And these are the situations a trader should exploit to the max.

Keep an eye on the commercials

A similar situation was present in gold in December, when bullish sentiment reached record low levels. The AAII survey of professional advisors reached only 5% bulls. This was a market ripe for a turn after a huge trending bear phase.

Incidentally, it is time well spent to peruse the COT data issued every Friday and pick out any glaring examples of extreme bullish or bearish holdings of the speculators. Also, note the position of the commercials (the smart money guys). If they are overwhelmingly on one side, then try to find a good reason to join them.

This was the hourly chart last week:

Gold price spread betting chart

The market had rallied across my upper tramline giving a buy signal, and I had my upside targets. My roadmap forecast a high, then a dip, and then a rally to a new high for the move.


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This is the picture this morning:

Gold price spread betting chart

This week, the market has moved up nicely, but suffered one of those gold moments by spiking down and then back up in a flash. This was the market’s attempt to kiss the centre tramline, which is a normal event. The market quickly re-asserted itself and went on to hit the Fibonacci 38% level before dipping again. And this morning, it is in rally mode.

Waiting for the market to speak

I have drawn in my third tramline and my main first target is where it crosses the Fibonacci 38% level again. Let’s take a closer look:

Gold price spread betting chart

I have two options for the wave labels on this rally. The first wave up is either wave 1 or wave A (of an A-B-C). The dip is either wave 2 or wave B, and the current wave could be wave 3 or wave C.

So far, there is no earthly way to forecast which count will turn out to be correct – we need to wait for the market to tell us. One clue to look for is if the market really takes off to the upside. That would suggest we have a wave 3, because third waves are long and strong. If the market nervously edges up, then we likely have a C wave. And when that ends, the market should resume its decline. This is because A-B-Cs are counter-trend.

But under either scenario, my initial target remains the $1,250 area. If and when it reaches that level, the only thing I can do is observe market action to allow it to tip its hand. If we have a wave 3, then this target may well be blown away and the next target becomes the 50% level at around the $1,270 level. And if the market really takes off, the 62% level at $1,290 is possible.

Looking at the bigger picture

In terms of trade management, a prudent policy would be to take at least partial profits on long positions if the Fibonacci 38% target is hit soon.

In terms of the bigger picture, the major trend in gold is still down. Any rally must be seen as a large counter-trend rally (with new lows under $1,180 beckoning). But if we do see a small-scale five-wave pattern up, as discussed above, then all bets are off and a major trend change may be in the making.

I have a feeling that the market will be subject to very large swings over the next few months, and excellent swing trading set-ups will be available. It is a market I shall be following very closely.

• 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.
ScreenHunter_01 Mar. 25 09.51

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2 Responses

  1. 10/01/2014, Quercus wrote

    The gold market is subject to various ‘stop logic’ events due to price manipulation and it is difficult to see how Elliot Wave Theory, etc., is applicable in these circumstances?

    http://www.zerohedge.com/news/2014-01-06/gold-flash-crashes-halts-trading

  2. 12/01/2014, Bronco Bill wrote

    On the Gold daily chart a resistance line (on the 14 day RSI) drawn down and across perfectly touching the highs made last August, October and December has at last been broken, 6 trading days ago.
    Gold looks set for an upswing but first may come back some to retest this line which should now be a support.
    If Gold does carry on heading north strong resistance would be at the 144 day MA now at 1296, around your 62% level John.
    The weekly and monthly charts look good too for the “bigger picture”.
    I agree John we could be in for some “large swings” over the coming months. My guess is what we will see is what we always see, turbulence, a good sign that a trend change maybe on the cards….could be for the Dow also, who knows?

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