Gold on a tear – but for how much longer

Gold's rally has sparked a flurry of excitement in the bullish camp. But has the market become exhausted, and we should now expect a move down? John C Burford investigates.

In my last email on gold on 8 August, the headline read: 'The big question for gold traders'. Of course, I was referring to the large wedge pattern on the daily chart - which way would the market break out?

Back then, the market was trading around the $1,610 area and today, it is trading much higher at the $1,670 region following a blistering rally.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Naturally, the rally has sparked a flurry of excitement in the bullish camp. Gold ETF sales are at record levels. And the latest commitment of traders (COT) data, from last week, showed a massive swing to the bullish side of the boat. This is music to my ears!

The rally broke out of the small wedge that I showed in the 8 August issue and here is that chart updated to this morning:


(Click on the chart for a larger version)

Advertisement - Article continues below

The lower line is the upper small wedge line and the upper line is the long-term large wedge line.

There are three important points to note on this chart:

The upside breakout and then the pull-back to kiss the line,The resumption of the uptrend in a thrusting movement,The rally to the upper large wedge line, where it now rests.

Recall from 8 August, I had a short trade at the $1,615 area with a protective stop at the $1,630 level. This trade will illustrate a very relevant point for traders deciding which time-frame to operate in.


(Click on the chart for a larger version)

My short was taken at $1,615 with a stop at $1,630. Although the market tried to rally, it failed to reach my stop and the market declined to the $1,590 region.

Advertisement - Article continues below

Traders who operate in the short-term would be looking to take profits on this down move, while traders with a more distant horizon would hold and perhaps move their stops to break-even after seeing the move down. Others would keep their stops at $1,630, and be stopped out on 21 August for a $15 loss.

The difference between the three outcomes is immense! From a possible 200+ pip profit, to zero gain, to a 150-pip loss. But in real time, no-one knows where the market is heading only in hindsight can we make the ideal trade! But sadly, your spread-betting firm will not credit you for these.

Entering a trade is the easy part

In the heat of trading, there are a multitude of different strategies for managing your positions, but only a few sensible strategies to enter the trade.

That is why experienced traders will tell you that entering a trade is the easy part, but the exit is much more problematic. Trade management is the most difficult part of trading. That is why you should focus most of your attention on this aspect.

Also, how many times have I made a trade and taken a profit, only to see the market move substantially in the same direction, leaving a massive amount on the table?

Conversely, many traders will have been stopped out of a promising trade for a loss only to see the market turn back around without them on board.

Advertisement - Article continues below

Don't worry, all traders have experienced this. It can be very frustrating. But learning how to handle yourself in stressful times is critical to your performance.

The key to staying sane in the markets is to have a consistent set of trading rules and to keep to them and this discipline is what many traders lack. Do not second-guess your trades therein lies madness. There will always be another great opportunity coming along to fire your imagination.

But the guiding principle should always be: if you lose on a trade, make sure it is as little as possible. The other guiding principle is to reduce your stress as much as possible and that means planning your every move beforehand.

Hunting for a short entry point

Now, with the market having reached the upper large wedge line, can I find any further evidence that the rally has exhausted, and we should now expect a move down?

Here is the daily chart again - and just admire my terrific tramline pair, which I could only draw with confidence this week:


(Click on the chart for a larger version)

Advertisement - Article continues below

The upper tramline has two major prior pivot points (PPPs) and two touch-points, while the lower line has at least five touch-points and no overshoots.

I consider these lines very significant.

So, using my tramline trading rules, I am looking for a short entry near current levels.

Can I find one?


(Click on the chart for a larger version)

Here is the hourly chart in close-up, and sure enough, I have a lovely new tramline as the lower wedge line with the downside break and the rallying kiss to touch the underside of that line.

Advertisement - Article continues below

This is textbook action it gave me a good short entry at the break, and at the kiss. My protective stop is above the upper wedge line (this is the same line as my long-term wedge line).

If I am correct, I am looking for a swift move below the previous low in the $1,660 area and would dearly love to see a small five-wave impulse pattern down from here. That would help confirm we have seen the rally top and the bear market - which started a year ago will resume.

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.




How and where to buy gold coins and bars

We have compiled a directory of leading gold brokers where you can buy gold bullion, coins and bars online, over the phone or even in branch. New t…
14 Jan 2020

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular

Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Investment strategy

Running with the crowd is bad for your finances – here’s how to resist it

To be a good contrarian investor, you have to avoid being swayed by the crowd. John Stepek explains how to go about it.
3 Jan 2020