After its recent big fall, gold has hit the trading target set by John C Burford. But what next? A massive rally or a bear run to the widely-touted $1,525 level?
In this period a major sentiment survey of market professionals had the bulls at a staggering 3%. That is no misprint. Only 3% were bulls. The rest were either outright bearish or neutral. I find that amazing!
There have been only a couple of occasions in recent years when the bullish consensus has been this depressed by this measure.
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If you have been following the pundits, you will have noticed the very negative press that gold has received recently.
How times change! Not so very long ago, it was virtually impossible to find even a neutral article, let alone a bearish one. In fact, in one of my articles, I made a note of this as a stand-out feature. It gave me one more clue that gold was about to decline back then.
So now the boot's on the other foot. The question is this: Is gold ready for a massive rally from here? Is this a wash-out of the weaker bulls?
Naturally, the gold bears had good reasons to be negative. For one thing, the market had rallied strongly for many years and many thought it was time to move on to pastures new. The market made its $1,920 high last year and had little prospect of moving beyond it, at least in the medium term.
And one new pasture was the stock market, which is in strong rally mode with bullish consensus riding high. This is related to the bear swing to gold, of course.
There's also been talk of the eurozone crisis abating and the US Fed has hinted it may waver in its commitment to quantitative easing (QE), thereby taking downward pressure off the dollar.
Taking all these factors into account, the conclusion many reached is that gold has had its day - at least for now. They saw little fundamental reason to hold gold.
Even George Soros unloaded much of his gold holdings recently, inducing small investors to consider selling right near the low, of course.
But are these seemingly good reasons enough to ensure a bear run to the widely-touted target around $1,525? This target has received wide publicity even in the mainstream media. And when it appears there, I reach for my contrarian hat.
Gold overshoots my tramline
So let's see what the charts say. Here is the long-term chart I showed you on 13 February with my tramline target marked:
(Click on the chart for a larger version)
And here is that chart updated to this morning (I had some technical problems this morning, which is why some of the price levels aren't showing):
(Click on the chart for a larger version)
Last week, the market was in free fall and overshot my tramline to reach the $1,550 level - only $25 away from the critical $1,525 level.
Once again, as we have seen in several markets these past months, a widely-advertised target is almost hit, but not quite. The stand-out example is also in gold, as the market came within a whisker of hitting the $1,800 level last October before declining.
Also, the market plunged right into massive chart support (pink zone) from last year. This is very important, as it provides potential fuel for a huge snap-back rally.
On Friday, I took a short-term chart on the recent plunge:
(Click on the chart for a larger version)
I have an excellent tramline pair off the $1,680 high. You can see the market even overshot this lower tramline as well.
That is when I suspected a low was at hand.
The bulls will pipe up after a rally
Looking carefully, you can see a small positive momentum divergence at the $1,550 low. That was the signal I was looking for.
A long trade here was, in my view, a low-risk trade, since I could set my stop under the low.
(Click on the chart for a larger version)
The move above the minor high at $1,570 was my final buy signal. And now it is acting as support. But note the A-B-C nature to the rally, so far (green bars).
In these conditions with a freefalling market, the question of long capitulation arises, where many of the weaker bulls just throw in the towel.
And this often sets the stage for massive short-covering and new buying.
Remember, the bears have had it their way for weeks now, and just maybe their assumptions are incorrect.
One thing I can guarantee: if gold rallies substantially, we will see the pundits bad-mouthing the bears and their analysis and proclaiming the soundness of their original strategy buy gold! But only after a rally, of course.
As a swing trader, it pays to be agnostic in such matters and play by the charts (and related data, such as sentiment).
For now, I have a long trade working with my protective stop at break-even. A Fibonacci 50% retrace to the $1,620 area is not out of the question.
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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