The battle of the tramlines

In recent posts on gold, I have shown how you can use the Fibonacci retrace levels combined with tramlines to plan many excellent trades. And since my last gold post on 6 February, there have been even more offerings!

Recall the hourly chart (below) from 6 February showing excellent tramlines.

I based the latest long entry at the $1,660 area as it came down to the lower tramline.

A move back up the resistance zone (pink bar) was an opportunity to take profit.

The upper tramline was missed, which is an early indication that the market was not strong enough to sustain the rally for much longer. This was likely to be a relief rally in an ongoing bear move.

Gold price spread betting chart

(Click on the chart for a larger version)

A decisive break of the lower tramline would confirm this view.

Naturally, if I were still holding my long trade, I would be placing a protective stop at break-even.

Spiked out

So let’s see how the market developed:

Gold price spread betting chart

(Click on the chart for a larger version)

Note that my lower tramline – parallel to the upper one, of course – passes right through the major low of the 4 January (purple arrow). This confirms I have a reliable pair of lines.

As I suspected, the rally did not last. On 7 February the market broke the lower tramline in a nasty spike and promptly recovered to move inside the trading channel.

As I never tire of saying, the gold market is full of spikes that can catch you out, so this event was not unexpected.

If you had placed a short order just underneath the tramline you would have been whipsawed. But don’t think ‘they’ are against you – every trader gets spiked occasionally.

The only advice I can offer is to keep watching for weakness, as this spike is a signal that the market probably wants to move lower.

A more secure entry point is the area of the pink bar, but you would be giving up a lot of potential profit.

Let’s go back to the daily chart for perspective:

Gold price spread betting chart

(Click on the chart for a larger version)

I can now re-draw my tramlines slightly to include the recent highs on the upper tramline.

This week saw a break of the minor low (pink bar), and this indicates the market’s next direction is probably down.

If the tramlines are still operating, the next target is on or near the lower tramline in the region of the blue bar under $1,600. 

Battle of the tramlines

Let’s now go back to the hourly chart for clues as to the near-term direction:

Gold price spread betting chart

(Click on the chart for a larger version)

Right on cue, the decline stopped at the third tramline with an overshoot.

Having hit a tramline, this is the moment of truth.

A resumption of the decline would propel the market towards my target, while a relief rally here would run into considerable overhead resistance.

So the odds favour a test at least of yesterday’s $1,640 lows.

Now I have a series of lower highs, can I draw in a down-sloping tramline pair?

Gold price spread betting chart

(Click on the chart for a larger version)

I certainly can! I do like the lower line, as it catches both major lows.

Now, this throws up an interesting question. If the new (red) tramlines take precedence, the target is near the upper red line in the blue zone (or slightly to the right) around $1,670.

So, this is a battle of the tramlines!

The near-term trend is down and so this has the edge, so far.

But with trader sentiment having taken a big knock in recent weeks – professionals’ bullish sentiment dropped to 10% – I am not ruling the rally scenario out.

All of this means I am on the sidelines, watching for another trading opportunity.

• 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.

2 Responses

  1. 13/02/2013, Mike Allsopp wrote

    Thanks John very interesting re: Tramlines helping with trading

  2. 26/02/2013, Peter Womersley wrote

    John I like your reasonings and the resulting actions which are based on your charting experience. I use Sharescope because of its excellent charting package. Do you ever use the MACD indicators to aid in the turning of a trend?

Commenting on this article closed

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