Gold is at a crossroads in the charts

A heads up that this is my last post before I take a short break. My next one will be on Friday, 14 March. In the meantime, I hope you have fun using your tramlines, Fibonaccis and Elliott waves.

Gold received a boost from Mr Putin on Monday over the Ukraine affair. I spent the weekend trying to remember my school history lessons and recalled that in the Crimean War of the 1850s, Russia was defeated. But I believe the result would be a little different this time.

That said, any shooting war seems like a very distant prospect, simply because nations today are so intertwined economically. Damage to one means damage to all.

Either way, gold is getting closer to my target at the $1,400 area that I had set last year.

I’ve also noticed that I’m no longer the only one with this figure as a target. I’m reading many such forecasts lately – this is inevitable when gold has been in a solid two-month rally, lifting prices by about $180. Remember, markets make opinions, and contrarians use this knowledge to get on board a new trend early.

Why I’m cautious about the gold bull market

Two months ago, gold had few friends – bullish sentiment readings were around 5%, which is about as low as it could possibly reach. And that was the ideal time to start looking for reasons to go against the majority opinion. This bearish opinion was set in place by the relentless decline off the $1,800 high in October 2012.

But I do not use sentiment readings alone to justify a trade. I only use them to confirm a trade which I have researched by my usual methods. Taken together, this is a powerful package.

In December, the bear market was over a year old and was fully entrenched in people’s minds. There was even a solid story behind the decline (stocks good, gold bad).

But two months later, bullish sentiment has rocketed to around the 80% area – a level where previous tops have been made. It is unusual to read a short-term bearish opinion today.

This is making me very cautious for the very same reason that I became bullish two months ago.

The market has hit an important resistance level

Another reason I’m proceeding with caution is that at this week’s high of $1,350, the market has hit an important resistance level – the closing of the October gap, which I have pointed out before:

Gold price spread betting chart

But that’s not all. The $1,350 level is also chart resistance. I have placed arrows where major market turns have occurred. The market believes the $1,350 level is significant. My conclusion: it would take a big effort to push well above this level in the near-term.

Gazing at the daily chart above, I am having great difficulty placing any major Elliott waves on the rally. In a two-month span of trading, this is very unusual, especially in the gold chart. The rally has been without even a minor setback.

My conclusion: this rally could be the first large wave of an unfolding pattern – say an A wave of an A-B-C, or perhaps a wave within a very large triangle.

Gold price spread betting chart

Here are two possibilities (there are more). My purple A and B waves are as I had them earlier this year. We are currently in purple wave C. This C wave could terminate here, or it could extend above my downtrend line.

If my excellent downtrend line is operative, and it reinforces the resistance mentioned above, then the market could bounce down from here. That seems to be the path of least resistance.

After that, the market could find support from ‘late to the party’ bulls, who were waiting for a dip to get long. This would push the market back up to my downtrend line. And another big test of the bull market’s strength would ensue.

The other valid possibility is for the resistance at $1,350 to be overcome within the next few days and produce this picture:

Gold price spread betting chart

Here, the market would move above my downtrend line to complete the C wave, which would also complete wave 4. My guess is that there are many buy-stops placed above $1,350 by old bears who have retained their positions throughout the rally.

If this occurs, the market will then decline to new lows in wave 5, which should approach the $1,000 area.

All of my analysis means that the market is at critical juncture as it closes in on my $1,400 target. If the market does break above $1,350 convincingly, then my best guess is that the market will fall short of the precise and now widely-touted $1,400 target.

History lessons for traders

You may recall that in 2011 when the market was in a steep ascent, a very common target was $2,000. The actual top fell $80 short. Anyone expecting a $2,000 print is still waiting.

Likewise, in October 2012, when the market was also in full rally mode, a common target was $1800. The actual top fell $4 short before peeling away.

The lesson here? When a round-number target is widely anticipated, it is rarely hit on the nose. If you have a trade, it is usually best to look to exit as common targets are approached.

Finally, I will leave you with this thought. If, like me, you can remember the huge gold bull market in the 1970s that produced a spike high above $850 in late 1979, then Russia’s invasion of a neighbouring country should ring a few bells.

Back then, Russia invaded Afghanistan because of the problems created by insurgents in that country. Plus ça change. The concern in the West was that the Cold War could rapidly turn into a hot one. Tensions ran very high.

And the very date of the massive invasion across the border marked the exact top in gold. The knee-jerk reaction of the market to this event was to push gold higher. But buying quickly became exhausted and it was downhill from then on for many years. It was a classic ‘buy the rumour, sell the news’ event.

But that was a grinding shooting war which resulted in Russia withdrawing with its tail between its legs. Today, conditions are vastly different. But all the same, could today’s events in Ukraine herald at least a minor top in gold?