The gold market is still on a downward trend

The downward trend in gold is alive and well - but how low can it go? John C Burford uses his chart-trading methods to hunt out clues.

I last covered gold on 12 July when the market was staging a relief rally from the huge collapse it had suffered from April to June. In those few months it fell from $1,600 to under $1,200.

But after such a descent, a relief rally is normal (some call it a dead cat bounce). My best guess back then was for a rally above the $1,300 area in an A-B-C pattern, where the C wave would end in the region of the down-sloping trendline. This was the chart I showed then:

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

And this is how it has played out since then:


The market duly made a complex A-B-C, where the first minor three-wave pattern was in fact, the A wave of a larger pattern. Note the large negative-momentum divergence also (red bar).

Advertisement - Article continues below

Also, if we zoom in on the A and C waves, they each contain clear five-wave moves. Remember, when you can identify a fifth wave, that signals the markets are about to turn in a counter-trend move.


This is the structure of the A wave which is textbook.

Trader tip: When you suspect you have a C wave, look for a five-wave pattern within on the hourly or even 15-minute chart. And when you can spot a momentum divergence in your fifth wave compared with the third wave, you have a high-probability set-up for a reversal and a great trade.

And here is the C wave:


And we have a large negative-momentum divergence at the fifth wave top.

Incidentally, as the market fell below $1,200 in June, there was a potential positive-momentum divergence on the daily chart. That was our clue that the market was about to bottom.

Advertisement - Article continues below

But this Elliott wave analysis of the A-B-C relief rally means that the downtrend was very likely still in force and that the rally was presenting a shorting opportunity.

Finding the resistance zone



The lower tramline sports several excellent touch points with a prior pivot point (PPP). And this week, the market rallied to touch the upper tramline.

This is an area where we should expect resistance.

Also, there is additional massive overhead chart resistance in the $1,330 area (pink bar). This is where previous lows were made.

Trader tip: Where you see a major low that was made previously, this area often acts as a point of resistance to rallies. This is a great example here. And combined with an upper tramline hit, the resistance here should be formidable and a great place to enter short trade (the downtrend is still in force). These trades can be low risk, since you can place your protective stop just above the tramline.

Advertisement - Article continues below

But that is not all! Momentum at the C wave high was over-stretched. In a region where previous tops were made (yellow highlights), that was another reason to suspect the rally would run out of steam.

The bottom line is that the downtrend in gold is alive and well and if my tramlines are still operating, my medium-range target is back to test the lower tramline possibly in the $1,000 area.

As you know, I like to keep my eye on the commitments of traders (COT) data every week. Sadly, with the reports released on Fridays for the situation as of the previous Tuesday, the current report is out of date. But I believe it's instructive.

Non-commercialCommercialTotalNon-reportable positions
(Contracts of 100 troy ounces)Open interest: 434,750
Changes from 07/16/13 (Change in open interest: -5,533)
Percent of open in terest for each category of traders
Number of traders in each category (Total traders: 297)

In the week ending July 23, the hedge funds (non-commercials) swung to the long side by a few percent.

If you look at the daily chart, that week saw gold in rally mode, rising $60 in the week.

This is additional proof that hedgies are largely trend-followers and mostly get caught out at market turns. Their abandoning of long positions on the way down to protect capital provides the fuel for sharp declines, as they hold the lion's share of the market.

Advertisement - Article continues below

That is why I love trading against the hedge funds!

With the market having turned down sharply this morning, I am quite sure this process is occurring as I write. The COT data for this week (to be released 16 August) will be revealing.

Market dopplegangers

Here is the daily chart going back to early 2011, showing the famous all-time high at $1.920:


And here is the hourly chart for the past few days:


The waves above the two shelves are eerily similar, and we now have a break below on the hourly last night to match the daily.

Isn't that curious?

Advertisement - Article continues below

Make no mistake, markets are patterned, and it is our job to discover those patterns so that we can make accurate forecasts. The study of Elliott waves is extremely helpful here.



Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019
Spread betting

Betting on politics: don't put your money on the SNP

Scottish voters are strongly opposed to another independence referendum, says Matthew Partridge. That opens up a few tasty punts against he SNP.
29 Nov 2019

Most Popular


Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020