This is the start of the pre-Christmas week, where traditionally, traders leave their desks for the holidays and trading grinds down.
I have a feeling they may be missing out on some considerable action this year!
There has been no real Santa rally this year. The Dow topped out on 8 December, and the euro last week made a multi-month low against the US dollar and exceeded my long-standing target of 1.32.
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Gold and silver suffered huge drops last week, as did most other commodities, including an 8% drop in crude.
That was a lovely Christmas present for the bears.
These markets have been buoyed largely by hope hope that the eurozone will come up with some kind of solution' to its sovereign debt mountain, and hope that the US will escape another dip and that economic activity will pick up next year.
But reality is now rearing its ugly head. Battle is being waged between the realists (the bears) and those with hope in their hearts (the bulls). That is why I believe in the holiday period we could well see a resumption in volatility.
Recall that I needed to re-position my lower tramline to account for the non-appearance of an A-B-C rally pattern off the first of my lower tramline placements.
In that email, I suggested that finally, I would expect an A-B-C rally off the deeply oversold low at $1,565.
I believe we are this morning in the process of forming my A-B-C:
I have drawn in the Fibonacci levels off the recent $1,760 high and the $1,565 low. Overnight, the market has hit the 23% level. This level represents resistance, of course.
But in the process, the market has moved up through my upper tramline. This is a warning!
Gold could rally harder than expected
Note that the recent consolidation has corrected the oversold condition, as momentum is now in more normal territory.
Gazing at the chart, I see the market has moved up through my upper tramline, has dropped back down to kiss' the line, and is currently moving away from it.
That means the odds are increasing that gold may stage a more vigorous rally! Bears need to be on the alert.
OK, where can I expect such a rally to end?
(Click on the chart for a larger version)
I have drawn my third tramline above the previous upper tramline.
This line meets the Fibonacci 38% retrace level in the $1,640 region. That is the level I will be using as my possible target and where I will be looking to short again, if the market can make it above the 23% level.
Failing that, if the market falls back to break the minor lows as marked by the pink bar, that would be a sign the decline was not over.
As I said, there will be a ding-dong battle around current levels.
My lastpost before the Christmas break will be on Wednesday.
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:
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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