Has gold topped out in the charts?

I thought I would cover the gold story today, because many of the scenarios that I outlined in my last post of 5 March – Gold is at a crossroads in the charts – have come to pass. On top of that, the charts are throwing up some very definite patterns. And they’re ones that I have seen many times before.

In fact, the recent action has vindicated my cautious stance concerning my long position which I took near the $1,200 level in early January.

A tell-tale sign that the rally has topped

This was the daily chart a fortnight ago. It showed the market pushing up into solid chart resistance at the $1,350 level:

Gold price spread betting chart

But then, while I was away, there was enough buying strength to push through this resistance. And it took out many protective buy-stops placed there by the shorts. This ‘running of the stops’ showed up as a rapid advance.

Here is the chart updated:

Gold price spread betting chart

The market advanced by nearly $40 in just three days as it ran through the stops. The swiftness of this rally was a tell-tale sign that the buy-stops had been satisfied. And when that happens, the most likely path would then be down as the buying power had exhausted.

This is an excellent example of how you can forecast a reversal from such a short-covering event – and look to take profits on a long position. And this is exactly what I did.

Proceed with caution

Recall from 5 March that I was proceeding with caution. This is the correct stance for a swing trader. As a rally develops, traders need to become less bullish.

This is precisely the opposite of how many traders think. They believe that since the market is rewarding them for their expertise in picking a winner, why not go for more? Let’s let the trend be my friend!

And this is where you can go astray, since an increasingly bullish feeling could induce you to do some dangerous things, such as add to your position near the top. Even a small reversal could then wipe out your hard-earned gains. This is very disheartening and would help destroy any confidence you had.

My advice: become more sceptical when long as a rally progresses.

There were two big warning signs for me that the rally was likely to top out. First, there was the bullish sentiment data showing bullish expectations running at near record levels (the daily sentiment index had reached over 80% bulls).

The second sign was the potential large negative-momentum divergence in the latter stages of the rally (red bar). This was confirmation that the buying power was waning.

Will the gold bull market make a comeback?

In the past ten weeks, gold has switched from being over-hated to over-loved. Aren’t traders fickle?

Remember, with the vast majority in the bullish camp at the highs, there is greater potential for sharp falls than there is for an extension of the rally.

But gazing at the above chart, the market has fallen back to the $1,350 support level. The big question is: will the support hold and the bull market resume?

Last time, I outlined several possible scenarios. This was one of them:

Gold price spread betting chart

The rally off the December lows is my C wave of an A-B-C pattern. This wave coincided with the large wave 4 up from the wave 3 low from last summer.

The market did break above the downtrend line and here is the chart updated:

Gold price spread betting chart

But if my C wave has ended this week, we should see a pull-back to the line in a traditional kiss.

So there are two hurdles to overcome for any further weakness. First, there is the current $1,350 level highlighted on my first chart, and second, the $1,300 level where the kiss would occur.

But is it too soon to write off the C wave rally?

The bulls have had their shock – now it’s time for a bounce

Last time, I mentioned that I was not a lone voice any more in calling for a $1,400 target. In fact, I have seen a deluge of references to this target level – and that is why I have been suspicious that it would ever be reached – at least not before the bulls get a shock!

On Monday, the market edged up to $1,389 – just $11 short – and then promptly fell away to the current $1,350 area. This is a shock of $40 in two days.

It’s time to take a look at the hourly chart for clues:

Gold price spread betting chart

The $1,350 level was resistance and with the break on 12 March, now became support – and this support is currently being tested.

The interesting feature here is the very large positive-momentum divergence with the market testing support.

This is leading me to believe we shall see a bounce from here. Selling pressure is waning and the larger trend is still up.

Here is a possible scenario:

Gold price spread betting chart

I have drawn in my tentative tramline pair. The lower line has a nice PPP (prior pivot point) and only one touch point (so far). Any rally off the $1,350 support should reach the upper tramline in the $1,360 area at least. And a break upwards of this line could result in an even larger rally.

When will we see the gold top?

So will we see new highs above the $1,389 level (to perhaps the $1,400 level)?

Let’s examine the state of the market following the sharp two-day fall of $40. This must have unnerved many bulls, who I am sure will take the opportunity to exit on any decent rally. This means rallies should be contained.

And as the tensions over Ukraine dissipate, gold should be under pressure.

In the last section of my 5 March post, I alluded to the 1980 Russian invasion of Afghanistan which marked the very top in gold which lasted for decades. I wondered if the Russian ‘invasion’ of Crimea would mark a similar top in gold. Hmm.