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:
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.
But could this small-scale rally turn into something more substantial?
The odds, on the face of it, appear daunting.
Here is the hourly chart:
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:
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.
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:
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.
So, if this is a genuine break-out, where do I think the rally will head towards?
Here are my tramlines on the daily:
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:
|(Contracts of 100 troy ounces)||Open interest: 397,035|
|Changes from 07/23/13 (Change in open interest: -37,715)|
|Percent of open in terest for each category of traders|
|Number of traders in each category (Total traders: 274)|
The hedge funds (non-commercials) have lightened up on their long positions, while maintaining a slightly bullish position.
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!