Gold reaches a moment of truth – which way now?

The last time I covered gold, I had taken some very juicy short-term profits from trading the down swings. And I was standing aside, waiting for the fog to clear.

In that post, I had noted a superb tramline pair on the daily chart that stretched from last September. See chart below.

That pair has been containing all trading since early March and enabled me to time my winning trades. Take a good look at the tramlines on that chart, because this morning they are back in focus…

When I wrote that issue, I was anticipating more downside action. But on 4 April, the market made a low at $1,612 – right on the lower tramline. 

This was also the Fibonacci 67% retrace of the huge swing from the 29 December $1,522 low to the 28 February $1,790 high. This was another reason to suspect a low was at hand!

Gold spread betting chart

(Click on the chart for a larger version)

And when I spotted a potential positive momentum divergence at that low, I began leaning more to the bullish side, but was unprepared to go long. That was a big mistake, I confess!

I had taken nice profits from the short side, and was not mentally ready to switch allegiance to the bullish cause. I had committed one of my trading sins!

Trader tip: This is where my bearish bias prevented me from taking a low-risk trade. The set-up was great – the market was on the lower tramline, which had held all previous declines and there was a positive momentum divergence. So what stopped me? In a word – fear of being wrong on a long trade, which had been the losing side up until then! In my 27 April workshop, I will focus on trader bias and what to do about it. Meanwhile, understand that we all have a bias (or three!) and a successful trader recognises theirs.

OK, no damage done, but no profit either. So let’s analyse the charts as of this morning.

Gold reaches an area of strong resistance

Here is the hourly chart, where I have drawn in the long-term tramline pair described above:

Gold spread betting chart

(Click on the chart for a larger version)

You can see how the market has rallied strongly off the 4 April low and is trading at the upper tramline in the $1,680 region – which is also the Fibonacci 38% retrace of the latest large swing down. This area should represent strong resistance.

But tramlines are there to be broken! We have not had a tramline break since the big rally to my third tramline on 28 February (shown on the second chart in my 30 March post), just prior to the huge $100 plunge on 29 February. Will this be the time?

Note the major highs running along the upper tramline since early March. Recall last time, I had suggested that with the big 29 February plunge, more bears were coming out of hibernation.

This is what I said then: On this decline, I have the feeling that some traders have been emboldened to add to their short positions. I shall be monitoring the COT (Commitments of Traders) data closely. If true, we could see some large up-swings as those short positions are covered (ie, gold is bought).

These bears will have many protective buy-stops just above these highs. If the market can reach them, the buying will be explosive! And we are only a few dollars from the first peak at $1,695.

If I see a shift in the speculators’ position from hugely long to less long, that would support my theory. So let’s look at the latest COT report:

Gold – Commodities Exchange Inc.
Futures only positions as of 03/04/12

Non-commercial  Commercial  Total Non-reportable positions
Long Short Spreads Long Short Long Short Long Short
(Contracts of 100 troy ozs) commitments Open interest: 407,761
175,592 33,827 20,401 155,751 333,215 351,744 387,443 56,017 20,318
Changes from 27/03/12 (Change in open interest: -9,543)
-6,777 -721 -2,258 3,416 -4,196 -5,619 -7,175 -3,924 -2,368

Yes, indeed. The non-commercials (large specs) have significantly reduced their long position. At the same time, the trade (commercials) have massively increased their long/reduced their short positions, so they are less convinced the market will decline. I consider the commercials the savviest of the bunch.

Watch this tramline for a potential upside break

So, I am now thinking the unthinkable – gold could rally above my upper tramline. If so, what is my target? Naturally, it is at my third tramline in the $1,720 region – which is also the Fibonacci 62% retrace:

Gold spread betting chart

(Click on the chart for a larger version)

What a terrific potential set-up. But first, the current resistance must be broken. This morning, we have a slight overshoot of the tramline, that’s all.

Will gold break through the centre tramline and head towards the third tramline? Or will it be contained in the channel where all the trading has happened since the start of March?

The matter will be resolved very soon – perhaps today? We’ll see…

• 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:

The essentials of tramline trading

Advanced tramline trading

An introduction to Elliott wave theory

Advanced trading with Elliott waves

Trading with Fibonacci levels

Trading with ‘momentum’

Putting it all together

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