Is gold heading for my $1,400 target?

While the rally in gold looks promising, the market is not without danger. John C Burford assesses the risks of his next trade.

The gold market is showing some interesting patterns. The market on the daily chart is in a clear downtrend:

13-8-5-MWT-1

But the near-term shows a rally. This is perfectly normal following such a collapse. Markets do not go down in a straight line. We get relief rallies some are called dead cat bounces as some shorts take their profits and bargain-hunters' step in to buy at cheaper prices.

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But could this small-scale rally turn into something more substantial?

The odds, on the face of it, appear daunting.

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Here is the hourly chart:

13-8-5-MWT-2

The rally has the classic A-B-C form with positive-momentum divergence at the C wave high. The C wave retraced a Fibonacci two thirds retracement, and we have a lower tramline break last week.

When we see A-B-Cs, that usually means the rally is a corrective move to the main trend.

Also, at the C wave high, the market has entered into stiff overhead chart resistance.

This would normally be a textbook short-selling set-up, expecting the bear market to kick back in.

But let us take a closer look:

13-8-5-MWT-3

I have a tramline pair drawn in. But as I do not have many touch points, this isn't a textbook pair, although I do have a nice prior pivot point (PPP) on the lower line.

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But there is a solid tramline break, followed by a head fake, where the market came roaring back into the trading channel.

All those traders who placed short-selling orders on the break are out of pocket and likely very surprised, as the trade looked like a high-probability one.

When I see a head fake this severe, I take notice! The market may not be ready to decline as I first thought.

So let us take an even closer look:

13-8-5-MWT-4

This 15-minute chart shows an excellent upper tramline with at least six touch points. This makes it a highly reliable one in my book.

And this morning, there was an upside break-out of this upper line.

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So, if this is a genuine break-out, where do I think the rally will head towards?

Here are my tramlines on the daily:

13-8-5-MWT-5

I have a good lower tramline complete with a PPP set back in August last year.

That puts an upside target in the $1,400 area.

Sentiment remains slightly bearish on gold, compared with the recent picture. Here is the latest commitments of traders (COT) data:

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
(Contracts of 100 troy ounces)Open interest: 397,035
Commitments
154,519126,15319,841188,832214,606363,192360,60033,84336,435
Changes from 07/23/13 (Change in open interest: -37,715)
-6,678-853-5,450-21,401-30,323-33,529-36,626-4,186-1,089
Percent of open in terest for each category of traders
38.931.85.047.654.191.590.88.59.2
Number of traders in each category (Total traders: 274)
10591665557192186

The hedge funds (non-commercials) have lightened up on their long positions, while maintaining a slightly bullish position.

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So, this morning, there is an intriguing possibility that the gold market could rally further before hitting my upper tramline in the $1,400 area.

But of course, this break-out could be another head fake!

Sadly, I know of no method that can forecast whether a tramline break will be a head fake or a genuine one.

The only thing a trader can do is to exercise discipline in trade entry and place sensible protective stops. Then let the market gods do their work!

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