A bear vs bull battle looms in the gold market

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.

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.

Where to now for gold?

Let’s return to gold, which I last covered on Thursday.

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:

Gold spread betting chart

 
(Click on the chart for a larger version)

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?

Gold spread betting chart

(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 last post 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:

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
.