Gold retreats – but is finding support

Once again this morning, I am faced with several alternative markets to cover – the euro, the Dow and gold are all shaping up nicely along their tramlines, Fibonacci levels and Elliott waves. And our occasional friend the Aussie dollar is doing likewise.

But gold looks particularly interesting to me this morning… so gold it is.

In last Friday’s post, I pointed out that on Friday morning gold was truly at a moment of decision. It had two clear options: either the three-wave pattern off the $1,796 high was the extent of the dip, and we could expect a resumption of the bull market; or the pattern was a ‘continuation’ pattern down and new lows would beckon.

It was truly at a moment of truth, heightened by the extreme bullishness of speculators (as revealed by the COT data – more later).

Well, later on Friday I got my answer:

Gold spread betting chart

(Click on the chart for a larger version)

The market attempted to rally above my tramline in the $1,770 area later on Friday, but failed and by Friday’s close, it had retreated down to my lower tramline at $1,750.

That was a clear indication that we had a continuation pattern on our hands and new lows lay ahead.

With the weekend upon the markets, that gives us all the space to examine our trading plans in detail without market noise distracting us. I recommend taking some time then to gather your thoughts.

“But isn’t that a powerful example of how tramlines represent areas of resistance for rallies and support for dips? I thought you would like that one!”

My line in the sand was the area in the pink bar, as a rally to this area would probably indicate new highs ahead.

So there we had a clear plan: short near the upper tramline with a protective stop (to reverse to long?) in the pink zone. That was a relatively low-risk trade.

Let’s see how things developed:

Gold spread betting chart

(Click on the chart for a larger version)

Here is the tramline trip I have been working with on the rally segment. Yesterday, heavy selling brought about a plunge below my lowest tramline – and crucially, a move below the major chart support low at the $1,740 level (blue-grey bar).

It was beginning to look as if we have seen the highs for this year at least and we had started a bear market.

But hold your horses! Before we go galloping along the bear’s trail, I have a few thoughts that put the bearish case into question – at least for now.

Let’s see what they are.


Is this an ABC rally extension?

Gold spread betting chart

(Click on the chart for a larger version)

The move down off the $1,796 high can be counted so far as an A-B-C or as a 1-2-3 in progress.

If an A-B-C, it would imply a rally extension – bullish.

If a 1-2-3, then wave 3 should extend down – bearish.

This morning, we had a move up off yesterday’s $1,730 low as it attempted a tramline kiss. And note the previous kiss on the centre tramline. This indicates my tramlines are still valid.

This rally could mean yesterday’s low is actually wave C.

Here is a closer look:

Gold spread betting chart

(Click on the chart for a larger version)

I have a superb lower down-sloping tramline with a prior pivot point (PPP) and several touch-points. And note the large positive momentum divergence at the $1,730 low – that is short-term bullish action, so the present rally is not unexpected.

And as I write, the market is challenging my upper line – just as it did last Friday!

So, will history repeat?

Note that we are at the crossing of two important tramlines and the Fibonacci 38% retrace – a triple threat to the rally.

This means that there is heavy resistance in the pink zone. Bulls watch out!

But if the market can overcome this resistance, my line in the sand is in the blue bar above the previous minor high at $1,770. That would swing the odds in favour of new highs soon.

Commitments of Traders data hint at longs

OK, so now I have my alternative scenarios this morning.

If we are in a new downtrend, confirmation would come if the market can break below the $1,730 level. That would indicate we are in a long and strong third wave down – the textbook case.

So these are the two critical levels I shall be watching – $1,730 and $1,780.

But already, the bulls must be getting increasingly nervous as yesterday, the market had taken back over $60 off the top.

Now, long-term investors would probably not be shaken out of the tree by this dip. I write about swing trades, and a $60 move equates to a £6,000 credit or debit on a £10 spread bet. I can be confident that this would grab the attention of most swing traders, especially if in debit!

And finally, does the latest COT data reveal anything significant?

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
Contracts of 100 Troy ounces Open interest: 484,359
247,401 35,452 32,187 131,714 398,702 411,302 466,341 73,057 18,018
Changes from 10/02/12 (Change in open interest: 3,451)
7,967 4,344 5,460 -4,536 -6,818 8,891 2,986 -5,440 465
Percent of open in terest for each category of traders
51.1 7.3 6.6 27.2 82.3 84.9 96.3 15.1 3.7
Number of traders in each category (Total traders: 354)
223 59 68 47 44 295 155

As of 9 October, the large speculators had slightly increased their longs, while the small speculators had reduced their longs more substantially. But not much there – I will be interested in seeing the next data set, and would be willing to bet there have been larger long liquidations from all speculators.

• 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

• Don’t miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I’ve written them, just sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.