The gold price is looking interesting again

You may recall that in my last post on gold on 15 November, I asked the question: is gold about to stage a rally?

I laid out the case for a counter-trend rally at some stage. This was partly based on the dire sentiment picture. According to the Daily Sentiment Index (DSI), gold has become so unloved that less than 10% of advisors were bullish.

And this bleak picture has been maintained since then, which leaves open the possibility for a good rally. Remember, major rallies occur on low bullishness, while major declines occur on high bullishness.

Then, I had a short-term chart showing my tramlines and a price target:

Gold price spread betting chart

This is clearly an A-B-C pattern and therefore counter-trend. Also, note the crossing of the major down-sloping trendline with the upper short-term tramline. I call that a ‘hat’ and is powerful resistance, since two lines of resistance meet there. This means that the trend likely remained down.

Hitting the target

Looking at the bigger picture, the rally had carried to the longer-term tramline:

Gold price spread betting chart

So here, the odds were really stacking up in favour of a continued downtrend. The market was likely not yet ready to stage my counter-trend rally.

So, was my target hit?

Gold price spread betting chart

I’ll say. Sharp-eyed readers will see that I have slightly re-drawn my short-term tramlines. That is because after I captured the first chart, I had another touch point low to work with later on 15 November. That produced a superb lower tramline with four accurate touch points.

But with a re-drawn tramline pair, the trend was still down. Naturally, the lower tramline break was a good short entry point following the A-B-C diagnosis.

This was the situation back then. So how has the picture changed this morning?


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Should I be looking for another tramline pair?

Here is the hourly chart with my tramlines drawn off the late October highs:

Gold price spread betting chart

The market continued down, following the trading channel between the tramlines in textbook fashion – until last Thursday. That was when the market went haywire as it toyed with my upper tramline. First it shot above my line in an overshoot, then passed down through it. It then rallied strongly up through it before dipping again – but right to the line in a kiss (marked by my lower red arrow).

The market recoiled smartly from this kiss and is in a bounce this morning.

What should we make of this? Because of the zig-zag trading around my upper tramline, I might be tempted to abandon my tramline altogether. And normally, it would be a good idea to search for another tramline pair.

But it is that kiss that landed precisely on my line that retains my confidence in it.

There is no shame in being wrong

Last Thursday, there was a legitimate long trade:

Gold price spread betting chart

The market was breaking clear of the tramline and appeared to have made a decisive break upwards. And to show the necessity of placing a sensible protective stop on all trades, that could have been placed just under $1,240, where the market had broken the line.

As it happened, the market did fall back and stopped out the trade for a small loss. That was a low-risk trade, and a good one, since I had analysed the picture according to my trading method and had placed a close stop, also in accordance to my money management rules.

There is no disgrace in being wrong on a trade. Losing trades are part and parcel of trading in a professional manner. Just keep the losses small on your losing trades and move on.

How to find the next big reversal

So let’s move on. With a good decline off the late October lows, I am on the lookout for a completed five motive waves to the recent low. If I can identify that correctly, I am on my way to bagging the reversal I am looking for.

Gold price spread betting chart

Here are my Elliott-wave labels showing a long and strong wave 3 and a positive-momentum divergence at the low red bar. This momentum divergence is usually a clue that a big reversal is coming soon, especially if it appears at the end of a long trending move, as we have had here.

And right on cue, the sharp rally yesterday was a classic post-divergence move. Now, with all of this information, it is highly likely that Wednesday’s low can hold.

The key for a decent rally is the pink area of resistance lurking at the previous highs. That is where an awful lot of buy stops will be lurking, having been placed there by the huge army of shorts who dominate the market.

Here is the latest commitments of traders (COT) data. Although it is over a week old, it shows the large specs have become even more bearish by a substantial margin:

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 394,432
Commitments
133,414 106,859 27,016 196,011 224,247 356,471 358,152 37,961 36,280
Changes from 06/11/13 (Change in open interest: -3,158)
-7,439 14,126 -1,787 5,905 -17,374 -3,321 -5,035 163 1,877
Percent of open in terest for each category of traders
33.8 27.1 6.9 49.7 56.9 90.4 90.8 9.6 9.2
Number of traders in each category (Total traders: 267)
88 95 68 58 55 184 188

 

Remember, the natural position is for the speculators to be massively long and the trade (commercial) to be massively short as mines hedge their forward production in Comex. This balance of long-short positions by the large and small speculators is unusual. It can therefore be considered very bearish.

The latest COT data will be released later today. And I shall be interested in seeing what the changes have been while the market has swung about my upper tramline.

• 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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One Response

  1. 07/12/2013, Bronco Bill wrote

    John, to give additional weight to your thoughts above… from a different angle.
    1) Friday was an “outside day” which may prove to be a reversal signal.
    2) The last five bars have not broken thru the lower band of a 20 day BBand and are also bouncing along the bottom of the lower band of a 144 day BBand.
    3) RSI Positive Divergence showing not only on the Daily but more important, on the Weekly and Monthly charts.
    As of today a break above the 20 day MA @ 1254 could lead to another go at the 144 MA @ 1322 which was hit in Aug and Oct…. and a break above could mean the ol’ yellow stuff would be off to the races again. We’ll see.

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