When I last covered the gold market in my post of 8 August, it was staging a vigorous rally in a c wave. This was the hourly chart then of my best guess scenario:
This is what I wrote: "Action in the last two days is impulsive and this makes me think it is a third wave. Remember, third waves are usually long and strong, which this clearly is.
"When this third wave exhausts, it will enter a fourth wave down. Where this third wave ends is uncertain, but the $1320 area is a great candidate because it lies at the Fibonacci 62% level. And when the w4 terminates, the market will likely rally in the fifth wave."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
My Elliott wave (EW) labels were the best guess on that day, but there was another possibility. Instead of a five-wave pattern in the c wave, it could be a three-wave pattern.
The fourth wave triangle is a tricky beast and the individual five waves within it can be either a three or a five and it is only in hindsight that we can be certain which pattern pertains.
Did I get it right?
What I got wrong were the EW labels. Purple wave c was actually a three (marked red A-B-C) and wave C was a clear five (marked in green). As this wave developed, that fact became clearer, especially when the very strong spurt up on 6 August printed (suspecting a third wave) and the very large negative-momentum divergence between waves 5 and 3 came into focus.
Remember, it is necessary to be flexible in placing labels on your charts, because the market can throw you a curve!
But what I did get right was the price target at $1,320. That was the area which I judged was critical for the progress of the rally. As they say, one out of two isn't bad.
But then, the market traded between the wedge that was forming and finally broke down below the lower wedge line where a short trade was indicated.
That downward break confirmed my new EW labels. Also note that after the break, the market rallied back to kiss the lower wedge line and then moved down in a scalded-cat bounce. That was another trade opportunity.
What the market is doing now
The market has declined to the B D support line and is currently bouncing off it. That is a great example of a support line bounce.
The big question is this: does this bounce have legs? Let's get back to the hourly chart for clues:
I have a magnificent set of tramlines here. The first tramline that I could draw was the centre line that practically drew itself with the highs lining up very accurately.
My lower tramline uses the stunning purple C wave top as PPP (prior pivot point) and has the plunge low of 15 August as an accurate touch point. I judged that pair to be highly reliable as lines of support and resistance.
I could then draw in the third tramline as a line of resistance and a target area if the centre tramline was to be broken.
And yesterday, the market did break above the centre tramline as it took out buy stops above the $1,280 region. That was a tradable event.
As I write, the market is trying to decide whether to challenge the B-D support line again, or continue up to the third tramline (and beyond?).
But the latest report (as of 19 August) shows the hedge funds slightly reducing their longs and increasing their shorts. This shift is not surprising because of the decline off the $1,320 level. They remain four-to-one bullish nevertheless.
To me, this means that any rally is likely to be muted, at least in the very short term. There may not be enough shorts to be squeezed in a big way.
But if a good rally can develop, that would lay open the question of where my E wave will terminate. And if the B-D support breaks, the downside looks ugly (for the bulls).
One other factor to consider is the US dollar, which has been in a huge rally for some time and is due for a pull-back. If the euro can stage a relief rally from here, that could help sentiment towards gold (and silver!).
If gold can reach my third tramline, I will be watching to check how the market reacts to this line of resistance.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
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.
Review: Eden Roc Cap Cana – fun, sun and golf in the Caribbean
Reeves delays cash ISA reform, but savers are not out of the woods yet
