Gold is a treacherous market to trade, and it is currently sitting at a crossroads, says John C Burford. Here, he looks for tramlines for clues to where it's going next.
On Monday, I noted a five-wave Elliott wave pattern down off last Friday's $1,796 high on the 15-minute chart. That gave me some good evidence that we have seen a major high.
A minor five-wave down pattern off a high is one clue that the high is genuine.
This may or may not be the top, of course. Only time will tell and sadly, nobody makes any money betting in hindsight, do they?
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
So we have to do the best we can given current input and a little imagination.
A basic knowledge of Elliott wave theory can give us clues as to what is likely to occur, especially in the near-term.
Today, I have a great example of this in action in gold.
My gold projection so far
On Monday, I counted the five waves down and suggested that we should see a rally phase hopefully in an A-B-C ending at the $1,780 region at the Fibonacci 38% retrace level.
This is what happened later on Monday and into Tuesday:
(Click on the chart for a larger version)
That was a nice bullseye.
The A-B-C rally had a very shallow B wave, but is recognisable as three waves.
The market then declined below the previous wave five low, thereby verifying my projection so far.
But with gold a most treacherous market I have to be on my toes for surprises, particularly since I am trading against the major trend. All I can say is that the market is going to plan at this point but there is a hitch.
Yesterday, the market obliged by declining to sub-$1,760 and then staged a rally.
That was not in the plan!
So let's see if this spoils my original analysis calling for a more substantial decline.
Here is the updated chart:
(Click on the chart for a larger version)
The pink bar represents chart support/resistance, which the market broke through yesterday first down and then up. This area is now support.
Then there is the clear A-B-C three-wave pattern (red bars) off last Friday's high and with an ominous positive momentum divergence (red arrows). This is potentially bullish action, of course. Hmm.
Now if the pink bar is truly support now, a break above the B wave (blue bar) should confirm resumption of the uptrend, and the market should go on to challenge the $1,796 high soon.
But can I find any tramlines to guide me further?
Below is the chart I took yesterday as the market moved up off the C wave low. I have a splendid lower tramline with multiple prior pivot points and excellent touch-points.
I then simply drew the parallel tramline across the only touch-point available last Friday's high. And just admire the way the rally was stopped in its tracks right on the line with a large spike. That is beautiful.
(Click on the chart for a larger version)
OK, so how is the market looking this morning?
(Click on the chart for a larger version)
First, note how the Wednesday low hit the Fibonacci 62% retrace of the large swing up from the late September low to the $1,796 high (red arrow). That was always going to be a problem area for the bearish case, and so it is proving.
Remember, Fibonacci retrace levels are good places to look for pauses in the corrections to previous swings.
So this morning, we are knocking on the door of my upper tramline again.
Will it or won't it?
But I know where my line in the sand is now and that is valuable information.
Two opposing forces at work
OK, we have two opposing forces at work here. On the bearish side, I have my original five-wave pattern down with the A-B-C rally and a new low on Wednesday.
On the bullish side, I have the larger A-B-C down with positive momentum divergence and of course, the main uptrend.
Which side will win out?
Here is one possible scenario:
(Click on the chart for a larger version)
We could be in a continuation pattern such as I have drawn and the upper tramline holds. This five-wave continuation patternis quite common, especially on short-term charts.
But to me, the odds are evenly drawn as I write. We will soon find out which one will win out and thereby hangs a possible trading opportunity using the rules I use.
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:
Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, justsign up here. If you have any queries regarding MoneyWeek Trader, please contact us here.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
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.
Review: Eden Roc Cap Cana – fun, sun and golf in the Caribbean
Reeves delays cash ISA reform, but savers are not out of the woods yet
