The red bars highlight this divergence, while the move above the pink resistance bar confirmed the rally.
It is worth looking at this action in more detail because it illustrates how, even today, classic chart patterns can still help you forge a reliable forecast.
Note that this resistance zone has several tops where the market had attempted to push above it but was bounced back down.
This set up a classic horizontal triangle:
The market had then finally moved above the horizontal line of resistance, which was an excellent place to set entry buy stops.
If you did that, you would not have been alone, as chart-reading shorts would have placed their protective buy stops there as well.
Incidentally, gold can move very swiftly as it runs through stops. In fact, it can move $10 or more in the blink of an eye! That is why I would use stop orders at times like these.
Claim your FREE report: The five-step game-plan for
spread betting profits
Will this rally keep going?
OK, now that I have a rally working, I want to know if it will carry further, or if the resistance will cap this rally.
On Friday, I noted that the market had carried to the Fibonacci 38% retrace of the entire move down off the 28 August high of $1,430.
But when we have a large swing down that has lasted almost two months, I like to see what other Fibonacci relationships exist with the major highs that were set on the way down.
I have highlighted a major top. It really stands out, doesn’t it?
So let’s apply the Fibonacci levels to the decline from this level:
On Friday, the market touched the $1,328 area – bang on the Fibonacci 62% retrace. Isn’t that pretty?
How to determine the strength of a resistance level
Now I have two lines of Fibonacci resistance at the $1,328 level.
This resistance should prove stiff – and a hefty barrier to further advances.
So you can see how I combine several Fibonacci pivot points to determine the strength of any particular resistance level.
In this case, I have two lines of Fibonacci resistance at the $1,328 level.
This is invaluable information.
But if the market can somehow punch up through this level, the next stop should be another Fibonacci level in the $1,350 region.
But this morning, this resistance appears solid.• 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.
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Three times a week I send out our spread betting email, 'MoneyWeek Trader', which gives you tips, secrets and trading strategies – to help you avoid the traps most spread betters fall into, and maximise your profits.
And with your permission, I'd like to send you MoneyWeek Trader for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site. Good luck with your investments!
John C Burford,
Editor, MoneyWeek Trader