The gold market has been on a slide since the January high of $1,300, pressured by booming stocks and still-low interest rates. Investors have been pulling money out of gold and putting into hot equities, such as tech and bio.
As just one measure of this flow of funds out of gold, Bloomberg reports that the Market Vectors Gold Miners ETF a major fund often used as a hedge against extreme volatility in financial markets has lost almost half of its cash since inception in 2006. I would guess that most of that decline has occurred since the 2011 top in gold at $1,920.
The commitments of traders (COT) data shows that gold traders are extremely bearish (see my postof 16 March "Gold is poised for a big rally").
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When a market becomes extremely bearish, it pays a trader to look for a low and to jump on board the new trend at an opportune time. That is the whole intention of my posts: to help you spot these signs for yourself, and to give you the tools to trade confidently.
In that postI showed the following chart. The big wave down is my B wave off the January A wave high at the £1,300 level.
With a complete five down pattern, I needed the market to break above the upper tramline to confirm the wave 5 low was in. Sure enough, that happened later on Wednesday.
Since Wednesday, the market has broken through my centre tramline, and is eating through overhead resistance. My first near-term target is the third tramline T3 in the $1,200 area.
Remember, when a market breaks a tramline in a convincing manner, I always put in the next parallel equidistant tramline to give me my next target. That may be a suitable place to take a short-term profit on at least part of your trade in accordance to my split-bet strategy.
Gold's sharp rally should mean more good news for longs
Now, I have clear evidence that the trend has changed and gold has certainly rallied by $50 off the low. But so far, I have only three waves up and that means I have two alternate Elliott wave counts. Is it going to be a five up or an A-B-C (which is a corrective pattern)?
If it's an A-B-C, that implies a resumption of the downtrend.
One clue lies over in the silver market. Silver and gold are sister markets, but usually have slightly different chart patterns. In the last few days, the silver market has simply zoomed up to my upper tramline target. The sharp rally is a hallmark of a third wave.
So, the odds are stacking up that gold also is in a third wave. If so, there is much upside to go for.
Of course, time will tell. But the initial signs with the extreme bearishness and the initial five up to wave 1 are very encouraging.
We traders have to go with what the evidence suggests. But remember, always keep a stop loss working just in case. We have to monitor the waves as they are put in, and be prepared to change our minds in the light of any new evidence. Those are the actions of a good trader.
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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