Gold is getting ready for a big rally

In a recent post, I noted that the skills required to be a good market analyst are very different from those required of a trader.

Today, I want to explore this idea with the use of the gold market, which is conforming to my forecast contained in my postof 3 September.

In that post, I forecast that the most likely path of gold was down. It was trading at the $1,270 level then and now it trades at $1,230. I based my analysis largely on my Elliott wave(EW) analysis of the fourth wave triangle (or wedge). Also, the line connecting the lows of waves B and D had just been broken:

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And this is the picture today on the daily chart:

As I forecast on 3 September, my first major target the wave D low was hit last week and the market now trades under that level in confirmation of the downtrend in wave 5.

This is what I wrote then: "One final thought - if the Ukraine conflict (and attendant economic sanctions) cannot light a fuse under gold, then the path of least resistance appears well and truly down."

So my forecast was highly accurate, despite the continued global conflicts, which by conventional thinking should support gold.

But how to trade it?

Maximise your chance of a profitable trade

That is where a different skill set is needed.

Because I am always looking for a low-risk entry for my swing trades, I just cannot jump in with both feet when I feel like it as an analyst can (because they have no money at stake!). I must plan my tactics carefully so as to maximise my chances for a profitable trade.

Before I do that, let's recap what skills I needed to analyse the market back on 3 September.

I needed a firm grasp of Elliott wave theory when the market makes a fourth wave triangle. Of course, I needed to be able to label the large waves correctly in the first place and to recognise early on that the market was actually forming a fourth wave triangle.

Then, I needed to recognise the March rally as a possible C wave, which would top out below the A wave. Any move above it would negate my EW analysis.

Finally, with waves A, B, C and D in place in June, I could project the E wave the final wave of the sequence to top under the C wave.

In August, with the market moving lower, I could then anticipate waves 1 and 2 of the fifth wave down. And with the break of wave 1, I can say the market is in a third wave down. That analysis gave me my roadmap.

In terms of trading, I needed to find a short entry based on my tramline system.

Here is a case in point from the last week in August:

I have a good short-term tramline pair drawn on the action up from the B-D line bounce. This bounce has an A-B-C form and there is a negative-momentum divergence at the C wave high.

The correct trade was to short on a sell-stop on the lower tramline break with a protective stop less than $10 away, giving me my required high-probability/low-risk entry. That entry was in the $1,285 area, giving a profit of over $50 to date. That equates to a $5,000 gain on a £1 spread bet. Nice and all gained from the correct application of my trade entry system.

Of course, although we have a good trade working, we must be on the alert for a possible sharp reversal and clues for this can come from a study of the market sentiment.

Don't be blindsided by a change in market sentiment

On the back of the recent decline, sentiment has become ultra-bearish with the Daily Sentiment Index (DSI) having fallen to only 9% bulls (silver bulls number only 7%).

That extreme bearishness alone puts me on high alert for an imminent reversal!

It is time to look at the short-term picture:

I have a good tramline pair working and the market has this morning rallied up to the upper line in another test. Note the very large positive-momentum divergence at Friday's low a sign that selling is drying up.

That is no surprise, because with only 9% bulls, there cannot be many bears left to add to the selling pressure. And this highlights a great way to read sentiment data. When sentiment is lop-sided as here, think of the army of bears as being nearly out of ammunition, while the bulls have yet to strike as they see low prices as a bargain.

With the tramline break, what are my targets? A normal retrace of a wave is 50%/62% and that sets my short-term targets at the $1,260 and $1,270 levels.

Of course, if the market rallies to kiss the B-D line and we know that kisses are common that target is in the $1,280 - $1,290 area.

Naturally, a tramline break would set off my buy-stop on my short trade and I would bag a great profit and go long.

Meanwhile, I will let the market decide, as always.