The gold market sell-off has begun

Today, I want to show how gold is following my roadmap and how the simple Elliott wave and Fibonacci ideas I use can pinpoint highly accurate targets.

On Friday, gold was trading at the $1,340 level. Then on Monday, it suffered a heavy collapse and traded over $30 lower on the day, and fell further yesterday.

So what shock news item emerged to produce this massive sell-off?

Of course, there wasn’t one. There was no sudden outbreak of world peace, no massive dumping of the metal onto the market, or a huge devaluation in the dollar. That is the traditional way of thinking of most pundits.

They want to believe a ‘story’ that rationalises market action. And despite plenty of evidence that news does not drive markets (I have outlined plenty in my posts), this error is still being clung to.

Why? Simply because it pays for them to spin a story that most people can follow and understand.

But that’s OK with me! It means that the same universal forces are at work to produce those sentiment extremes I rely on to forecast market tops and bottoms.

If traders suddenly realised the error of their ways, I would be in big trouble.

But I am confident that will never happen in my lifetime – or anyone’s. Most traders believe they can figure out the market from what’s called the fundamentals (economic data, mine production, jewellery demand from China, and so on).

I don’t even try to understand these fundamentals, because I don’t need to. Give me a chart and sentiment data and that’s about all I need.

My gold forecasts, derived purely from chart action and sentiment, have been pretty accurate so far this year. How have the fundamentalists’ forecasts fared?

Here’s what happened on Monday

So, how does Monday’s decline fit into my best guess scenario that I outlined a few months ago?

This is a close-up of my road map that I showed on Wednesday:

Gold price spread betting chart

I labelled the recent rally as an a wave within the larger E wave, and expected a decline in a b wave. This is what I wrote:

“But I have one problem with this budding E wave – it has been straight up. Note that all of the other letter waves have a structure. A wave is a five up, B wave is a three down, C wave is five up, and the D wave is three down. I would expect the E wave to be either a three or a five.”

I reasoned that if my curious trendline could be broken, that would force the market sharply lower, since there would likely be a mass of sell-stops placed there by the bulls. It was an obvious place to set stops. And many of these bulls were late-comers to the party as revealed by the latest commitments of traders (COT) data:

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 410,992
Commitments
203,464 53,443 27,240 135,998 302,001 366,702 382,684 44,290 28,308
Changes from 07/01/14 (Change in open interest: 9,179)
2,177 -1,819 5,249 554 6,102 7,980 9,532 1,199 -353
Percent of open in terest for each category of traders
49.5 13.0 6.6 33.1 73.5 89.2 93.1 10.8 6.9
Number of traders in each category (Total traders: 277)
132 67 68 52 57 216 166

 

The rise in the number of bullish speculators in recent weeks has been marked. As of 8 July, there were now four times as many bulls as bears within the hedge fund sector (non-commercials).

As I wrote on Wednesday: “Have they overstretched themselves again?”

We all know what happens when the market sniffs out a mass of stops – it guns for them. In market parlance, the market runs the stops – and that is exactly what occurred on Monday. There was no external news item to provoke the selling. There was simply a dearth of buyers at the $1,340 level and the touch paper was lit.

But crucially, it did confirm my forecast for a b wave dip.


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:


The moment of truth

So how does my best guess scenario look on the chart now?

Gold price spread betting chart

This week’s decline certainly qualifies as a b wave, having made a clear break of my trendline. Note that it stopped falling yesterday on the precise Fibonacci 50% level – a remarkable confirmation of the forecasting abilities of Fibonacci.

And the 50% level is one of the most common places for a turn. The other common turning point is the 62% level, and the market could decline to this level without invalidating my scenario.

But now we are at the moment of truth.

There are two alternatives: the first is for the market to make a base here (or nearby) and then rally up in wave c to carry above the a wave high, making the final E wave top. The second is for the market to continue lower, having already put in the E wave top at the a wave high.

The second option is on the table, because the form of the a wave is in a clear five motive waves (marked by green lines). And the third wave also contains a clear five sub-wave pattern. This implies that the a wave is complete and we are in the final large fifth wave down.

Which way will the market go?

Let’s look at the form of this week’s decline for any clues:

Gold price spread betting chart

This is a textbook five-wave motive pattern, complete with a positive-momentum divergence at the wave 5 low. And admire the precise hit on the 50% Fibonacci level.

With a five down, the normal outcome is a three up, but after that, one of the two options should kick in.

But under either scenario, my best guess is turning out to be highly accurate, so far.

• 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.

 

How to buy gold in 2014

At MoneyWeek, we've always believed in the power of gold. It's been exchanged for thousands of years & a proven store of value. We think you should put at least a proportion of your wealth in the metal.

So to help you make an informed decision, we've compiled a FREE report called 'The Gold Profit Plan'. It'll show you exactly why gold is such a powerful asset – and how you can go about buying it.

To claim your free report and start receiving MoneyWeek's free daily email Money Morning, simply enter your email address below.

Simon Popple
Metals and Miners


2 Responses

  1. 16/07/2014, Bronco Bill wrote

    Always good to read your articles John, very informative and interesting.
    I dont trade gold short-term, the Dow keeps me busy enough. However for us out there who hold the physical stuff things now are starting to look interesting again for the long-term.
    On the Monthly chart gold has been flirting with the 9 month EMA for six months and is now just 3 dollars below after being above this month. The TSI momentum indicator I use looks to be poised to give a long-term buy signal since the sell signal given in October 2011. Also, the 50 day MA is poised to cross up and over the 200 day MA, the so called “Golden Cross”.
    It could be tomorrow, next week or a few months time, but just going by the charts it will be of no surprise to see some dramatic changes for the Dow and Gold….which could take many by surprise.
    As always, time will tell.

  2. 17/07/2014, Dave k wrote

    Gold now rising , 1294 was the turn.
    Where do you see the wave 4 top? I think 1400

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Cheaper oil

Who benefits?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Vote in the MoneyWeek Readers' Choice Awards

Vote for your favourite financial services companies in the inaugural MoneyWeek Awards, and you could win a year's subscription to MoneyWeek magazine. Find out more and vote here.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.