The gold price has made a big comeback
While backs were turned, gold staged an impressive rally. John C Burford analyses the charts to find out where gold is heading next.
With the can having now been kicked down the long and winding road in Washington, I can turn my attention to gold a market where the recent sharp declines have resulted in an equally sharp reduction in commentary by the gold pundits.
When gold is in rally mode, the coverage is extensive and enthusiastic. This mirrors the conventional reaction to rising markets, where most people become more and more excitedly bullish as prices rise, reaching a climax at tops.
It is when it goes quiet that you should expect a turn up. Yesterday was a prime example!
A roadmap for your analysis
In the short term, I was waiting for a five-wave pattern to be completed:
If a wave 5 would appear, below the low of wave 3, then I can expect a relief rally and hopefully an opportunity to search a short trade.
That is the great benefit of Elliott wave analysis - it gives you a clear roadmap.
And if the market fails to follow this map, then you know your analysis is wrong. It also gives you the signal to take evasive action, if necessary.
But as it happened, I did get my wave 5:
Any trader wishing to go long gold could use this knowledge to enter low-risk trades.
Instead of just jumping into the market with no roadmap, a trader could, for instance, wait for the fifth wave (and note the positive-momentum divergence to boot) and consider entering a long trade on a buy stop just above the wave 4 high.
Now, at this point, we should expect a rally and sure enough, a big rally ensued.
Multiple waves make for a more complicated analysis
In fact, there are many waves and they do not easily lend themselves to a simple Elliott wave analysis.
Of course, an aggressive trader would be looking to short near the Fibonacci line at the $1,328 level, whereas a more conservative trader would look to short on the break of the wedge line.
Either way, the result was excellent, as the market fell sharply and broke below the early October low in a blow-off plunge.
When to expect a rally
Wave 3 is long and strong, wave 4 has a clear A-B-C, and wave 5 sports a positive-momentum divergence.
When all of the boxes have been ticked, you can conclude the decline has run its course and expect a rally.
And what a rally!
Yesterday, the market rallied almost $40 on the day and squeezed many shorts, who had built up large positions.
Sentiment was very bearish gold (as reflected in the paucity of coverage I mentioned above), and the market was ripe for a major correction.
Is this rally a prelude to another decline?
Here is the daily chart:
Yesterday's rally broke the solid tramline and is pausing at the Fibonacci 38% retrace level, which is expected.
After a tramline break, we normally see a pull-back to the tramline, and sometimes it kisses the line before moving back up in a 'scalded cat bounce', or crashing back through the line.
There is no way to forecast which scenario will play out, but the odds do favour a pull-back, at least to the line.
With this knowledge, you can plan your trades using a disciplined, methodical approach. Keep in mind that any alternative to this approach invariably gets a trader into trouble.