Has the gold price finally hit a low?

published 2 December 2015

On Monday, I made a confession: I had got gold wrong since October. I laid out the error of my ways for all to see. I even referenced a bearish article by an authoritative gold observer as a penance (it is well worth reading).

And lo and behold, the market started a counter-trend rally on Monday and has continued into this week. It is as if the trading gods were waiting for me to confess and then, when they thought they had turned me into a bear, ran the market up to see if they could take me out of any short trade I had put on.

It is the easiest thing in the world to give in emotionally and join the herd, is it not? The market proves you wrong for a length of time and the doubts build up. Then, psychology works on you to change your mind and finally when you can take it no longer seek comfort in the large herd of bears.

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And immediately after you have acted, the market immediately turns and proves your first idea was correct after all. I'm sure it has happened to you if you have been trading a while.

That whirlwind of emotions is what gets you into trouble. That is why gaining an understanding of your thought processes and emotions is a necessary part of becoming a competent trader. In fact, it supersedes all of the technical knowledge you may have gained. You need to stand aside from your emotions and examine them rationally.

So how did I handle this turn of events? By stubbornly holding my ground.

The market rarely hits a round-number target

At that time, I forecast a pull-back to around the $1,065 level in wave 4, and then a rally in wave 5, which ideally should take it over the wedge line.

If and when the five up was in, I could have much more confidence that Friday's low would hold for a long time. But for now, I expected a dip to around the $1065 area in wave 4 and then a move up in wave 5.

So, how is my short-term forecast panning out?

Here is the current hourly chart:

This rally has the potential to mark a major low. That is because my red wave 3 contains its own clear five up (marked in green), which is a clue that the trend has changed.

Recall, a major trend change from down to up is usually marked by a small-scale five up off the low.

All I need now to confirm the trend change is a rally in wave 5 above my upper wedge line. Until then, that line remains resistance and the downtrend is still in place.

Incidentally, the $1050 level is a widely-accepted target. The low print on Friday was $1,053. If that low holds, it is another vivid demonstration that when a round-number target is out there, it is rare for it to be hit the market often falls a little short.

And that presents a problem: if you have a target and the market just misses it and moves away to reduce your paper profits, how do you handle your trade?

Two events this week could make the markets churn

But will the euro and gold weaken on cue? The overwhelming majority of pundits and money managers expect that which makes me believe it is unlikely to happen!

Remember the old aphorism: "When the majority believes something is obvious, it is obviously wrong".

But that is not the only date-certain market-impacting meeting to be held this month. On Friday, OPEC will meet and if they - and especially the Saudis - decide to cut production, that could send crude oil prices and in sympathy many commodities as well as gold rocketing. It would indicate that there is a now serious attempt to cut raw material production to alleviate the huge stockpile overhang.

And that's not all on Wednesday the 16th, the US Fed will meet and release its decision on the Fed Funds target rate and the overwhelming consensus is that it will start raising them.

So, with euro interest rates on the verge of declining and US rates about to rise, will the euro and gold sink even further, as most expect?

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.