When I last covered gold on 22 September, I put the case for an imminent upside reversal from the steep downtrend it was enduring. This downtrend was so persistent that virtually all of the bulls had thrown in the towel and the DSI (daily sentiment index) had sunk to a paltry 7% bulls.
That low bullish reading was truly scraping the bottom of the barrel and I knew that these were ideal conditions to set up a severe counter-trend rally of some magnitude.
This was a rally I wished to trade from the long side, having taken profits already on the move down. I foresaw a move of at least $100. Depending on your spread betting platform, this could translate into a profit of $10,000 for a £1 bet. Very juicy!
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It certainly was at least, for a while. The market then took off and moved above my upper tramline which triggered a long trade. So far, so good.
The upside break was sharp and now, the test was to see if any pull-back to the tramline would hold. This is the litmus test for any breakout and proves whether it is a genuine break or not.
In fact, the market did pull back to the line in a kiss but did not follow through in a scalded-cat bounce as I expected.
The market then dribbled down back into the trading channel and my trade was taken out on my stop, which was placed just under the tramline.
It was back to the drawing board for me.
But the action showed me that although my timing was out, I was getting closer to the turn.
Why it's OK to have a losing trade
The initial losing trade I just described is typical of my trading style. In gold, I often have to take one or even two abortive trades before getting on board a good new trend. The key though, is that I ensure the loss is as small as possible on those losing trades.
If I can look forward to at least a $50 gain say, I can afford to lose $10-$20 in the process.
I decided to step back and watch the market develop over the next few days and when it made a new low on Monday, I could place my Elliott wave (EW) labels:
I had my five complete waves! In addition, wave 5 planted a nice kiss on my upper tramline and staged the scalded-cat bounce that I was expecting.
The deeply oversold momentum reading at this fifth wave low told me that this was the wash-out selling exhaustion I had anticipated. If so, the big rally can get started from here.
Naturally, the ideal long entry was near the wave 5 low. But you needed nerves of steel to place that trade after all, the market was in a steep downtrend. Are we not taught to never trade against the trend? Like all rules of trading, if you know what you are doing, you can break them safely.
And nerves of steel is what a good trader very often needs. As it happens, some of my best low-risk trades are taken against the trend. But you need a solid method of analysis to winkle them out, such as my tramline system.
Have the gold bugs come out of hiding?
Time now to search for a new tramline set:
And I have an excellent pair here with the lower tramline having multiple accurate touch points (a near-rarity on the spiky gold charts). Then, the market broke up through the centre tramline, came back to plant a textbook kiss and roared back up in a solid scalded-cat bounce.
That sealed it my budding large counter-trend rally was on. And the short squeeze I had forecast was now in progress.
Note the market made it to my third tramline which I had drawn when the centre tramline had been broken. That was an excellent place to take at least partial profits. The gain was a very decent $45 off the low, which is about half-way to my expected target.
Looking at the bigger picture on the daily:
I now have my third wave low and the market is now in the fourth wave. My first realistic target is on the upper tramline around $1,240.
But if gold catches a bid, the upper target is possible.
Are the gold bugs coming out of hiding at last?
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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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