The gold market is still on a downward trend

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:

Gold price spread betting chart

And this is how it has played out since then:

Gold price spread betting chart

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).

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.

Gold price spread betting chart

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:

Gold price spread betting chart

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.

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

So with this rally came the possibility that I could draw in some meaningful tramlines:

Gold price spread betting chart

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.

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-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of 100 troy ounces) Open interest: 434,750
Commitments
161,197 127,006 25,291 210,233 244,929 396,721 397,226 38,029 37,524
Changes from 07/16/13 (Change in open interest: -5,533)
4,626 -6,103 2,220 -12,513 -2,424 -5,667 -6,307 134 774
Percent of open in terest for each category of traders
37.1 29.2 5.8 48.4 56.3 91.3 91.4 8.7 8.6
Number of traders in each category (Total traders: 297)
116 102 78 54 59 214 199

 

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.

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

Before I leave, I want to show you a curious similarity in chart patterns.

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

Gold price spread betting chart

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

Gold price spread betting chart

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?

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.