A great gold trade

As you know, I have been bearish on gold for some time. I had felt so alone in believing that trading from the short side offered greater profit opportunities. Until the big second top at $1,920 an ounce was made in early September, that is.

The big decline off this top has drawn more traders to my view, and I now have some company.

When I last covered gold on 28 September: Where to now for gold? the market was staging a complex rally off the low at $1,532.

I had pencilled in an A-B-C labelling, where wave C had hit the Fibonacci 38% retrace. We know from Elliott wave theory that A-B-C waves are corrective to the main trend, which is down.

In fact, if you can spot a clear A-B-C pattern on a chart, that is confirmation you have identified the correct trend direction. It is one of the giveaways I use constantly.

• For more details on how to use Elliott wave theory, see my video tutorial: An introduction to Elliott wave theory.

Would gold’s rally hold?

Since then, the market did stage a further rally back to the same Fibonacci 38% level. This was going to be a critical point – would that level hold or not?

Here is the chart showing the two touch points to the Fibonacci 38% level marked by the yellow and green arrows:

Gold spread betting chart

(Click on the chart for a larger version)

At the green arrow, I needed to become ultra-alert to developments. For guidance, I needed to search for short-term tramlines.

And I found a beautiful pair on this 30-minute chart:

Gold spread betting chart

(Click on the chart for a larger version)

Using the low of 29 September as one anchor point, I was able to draw a tramline clean across the lows of Friday – and the important high on Monday.

My parallel line was easy to draw – right across the lows from late Friday.

It was looking good yesterday for a possible reversal, especially now that a potential negative momentum divergence was forming.

On the far right of the chart, we see the rally to the $1,680 Fibonacci 38% level. That was a key level. If my lower tramline held, we should have seen a move above the $1,680 level.

Instead, we got a sharp break of my lower tramline where I was waiting with sell orders!

That was confirmation that the second rally high to the Fibonacci 38% level had held.

Now the lower tramline had broken, I immediately put in another third tramline underneath to give me a target.

Gold spread betting chart

(Click on the chart for a larger version)

Multiple tramlines are crossed

The market bounced off this third tramline, then plunged below in cascades of selling.

With that break, I drew in my fourth tramline equidistant from the third one. And that one also was penetrated in short order, so I had to draw in a fifth tramline.

That one, too was penetrated – with a slight overshoot.

But of course, no market drops forever and momentum was getting washed out, and so this was the area where the market could stage a relief rally.

That was some selling as stop-loss orders were hit on the cascade down.

But note the relief rally has carried to the underside of my fourth tramline – so far.

A short-term trader would have shorted at the $1,660 area and covered at the $1,610 area for a superb gain of $50+, or a profit of £500+ per £1 spread bet.

OK, what now? Here is the latest chart as of this morning:

Gold spread betting chart

(Click on the chart for a larger version)

I have drawn in the Fibonacci levels from yesterday’s high and low. The relief rally should stop at one of these levels, or close to it.

Already, the 38% level has been reached, and there is a real possibility that the 50% level at the $1,635 area can be attained. That would be a great place to offer some short trades, especially if a negative momentum divergence can be seen.

But longer-term traders will be happy to sit on their short trades made in the $1,660 area. They will be looking for the market to challenge the $1,532 low – and move below it.

Gold is proving to be a wonderful trading vehicle, along with the Dow and the euro and anyone using my methods on just these markets alone can take advantage.

• 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
Trading with Fibonacci levels

• 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