If this line breaks, expect fireworks in gold

Remember, I’m not giving you live trade advice in these posts.

What I’m trying to do is show you how you can use the methods I’ve developed to consistently profit from the markets.

One of my favourite markets to trade is gold – and it’s giving us some great lessons in tramline trading today.

It could be set for a big move – as I’ll show you a little later.

When I last looked at gold on 13 April, the market had rallied to the $1,680 area and was pushing up against my upper tramline.

When a tramline is hit like this, the question in my mind is always: Will it break through or bounce off?

This was the situation back then:

Gold spread betting chart

(Click on the chart for a larger version)

Sadly, I have not yet discovered a fool-proof method for forecasting which outcome will occur! But there are often subtle clues.

One of the clues I look for is well illustrated in the above chart. Note that as the market rallied up to the upper tramline, momentum readings on the hourly chart were in the ‘overbought’ region.

To me, this indicates that much of the buying power was being spent on the way up – and when the tramline was hit, that power was already drying up.

Of course, this is not a guarantee that the market could not find a bid and break the tramline – perhaps on developments in related markets. But it is a good starting point.

Gold reverses on ‘Turnaround Tuesday’

In fact, the market did respect the resistance of the tramline and fell back to the $1,625 area on Monday. Since then, it’s been rallying again. 

In fact, yesterday’s rally illustrates a well-known effect called ‘Turnaround Tuesday’. This describes the curious effect that whatever trend was going on Monday – usually an extension of the previous week’s trend – the trend often reverses on Tuesday. Please don’t ask me why. It’s just something I’ve observed over the years.

Anyway, with this action, I am now able to draw another set of tramlines on the hourly chart:

Gold spread betting chart

(Click on the chart for a larger version)

I took this chart yesterday as the market had hit not only my lower tramline, but also a Fibonacci 76% retrace of the big wave up from the 4 April low to the 12 April high. The 76% retrace is the black line at $1,626.

Trader tip: When the market is correcting a wave, put in your Fibonacci levels right away. Very often, the retrace will turn around at one of these levels, as it has done here.

OK, the market has rallied up to my central tramline. But how secure are my tramlines as drawn? That is always a consideration to me.

Going further back in time shows these are good tramlines

What I like to do in this respect is go back in time and see if my tramlines extend back to pass across significant highs and lows. The more touch points – and the more distant spacing – the better:

Gold spread betting chart

(Click on the chart for a larger version)

Lo and behold, my lines do indeed pass through highs and lows in late February – and the major high on 9 March. I was very glad to see that pop up!

So as I write this morning, with the market still up against my central tramline in the $1,640 area, where is the market likely to head now?

Take another look at today’s second chart. See how I have drawn in a positive momentum divergence of the action from mid-April (green arrows). What that’s showing is that the momentum is not following the move down – yet. This is potentially bullish, of course.

That adds a little spice to the mix! If the market can rally over the central tramline towards the $1,650 – $1,660 zone, there should be big waves of buying.

Why do I say that? It’s simply that, as I have noted before, there has been a shift in sentiment from manic bullishness to more bearishness, although the market still has a bullish bias.

That means the new shorts will have their protective buy-stops in this region (above recent highs) – and the blue touch paper would be lit. Remember, this is the set-up I mentioned last time, but the market needed another dip first.

If gold breaks my upper tramline, it could move swiftly higher

Remember the old market saw: Markets exist to punish the majority! They do this by what I call head-faking. And we may have an example this morning:

Gold spread betting chart

(Click on the chart for a larger version)

Was yesterday’s move to the $1,648 level a head-fake or a genuine break? After all, the three pokes below my lowest tramline (red arrows) certainly were.

But this is typical behaviour for gold – it is a very spiky market.

As I see it this morning, the odds do favour a rally towards my upper tramline.  If this occurs, and my upper tramline is broken, then the buy stops at the $1,650 area will come into play – and that would mean fireworks!

• 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

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