Is gold still in a bear market?

Today, I can finally get back to one of my favourite (though often frustrating) markets: gold.

As you can see from my previous articles, I am a bear on gold. It satisfies my basic contrarian personality at a time when the public is overwhelmingly bullish on the metal.

Since my last article on gold on 10 February, the market rallied initially – then suffered a $100 plunge on 29 February. It is struggling to get up off the floor as I write.

In that article, I had a first downside target at $1,710. The market duly made a low just below that level in mid-February.

But then it found support. It never made it to my second wave target of $1,660. Instead, it rallied to the $1,790 level, which was the high prior to the big drop. 

This cancelled out my initial Elliott wave third wave down hypothesis, but it did confirm my A-B-C alternative.

Trader tip: This refusal to follow the Elliott wave script for third waves of a potential five-wave sequence is one of the greatest benefits of this theory. 

At an early stage, I could see that there was not going to be a ‘long and strong’ third wave. I could then abandon any short positions and label the down move as a counter-trend A-B-C pattern, from which new highs can be expected.

However, the market has since dropped to a low at the $1,660 level – my second initial target. As I never tire of saying, markets exist to surprise the majority – in this case, me!

So can I say that the bear market is under way again, or shall we see new highs above $1,920 – the current all-time high? Let’s get right to the charts.

Where to now for gold?

Gold spread betting chart

(Click on the chart for a larger version)

This is the daily chart showing the action off the $1,920 double top made in late summer last year. 

Right away, I can see that the $1,800 level offers very powerful resistance. I have marked this area with the purple bar. Obviously, it would take a massive effort now to overcome this.

Also, I can see the recent rally to $1,790 sports a very clear A-B-C form – complete with negative momentum divergence as marked by my green arrows. 

This indicates that the buying conviction to put in the C wave, was weaker than that to make the A wave. These divergences are often preludes to reversals – as occurred here.

The bear case for gold is strong – but not in the short term

So far, I have a strong case for the bear cause. So will it be plain sailing from here down towards my major target at sub-$1,550 (the December lows)?

To add a little spice to the mix, here is the hourly chart showing the move off the $1,790 high:

Gold spread betting chart

(Click on the chart for a larger version)

I can label these waves down as a potential A-B-C pattern – complete with a potential positive momentum divergence. (The plunge from $1,790 forms wave A, the rebound from there up over $1,720 would be B, and the drop to $1,660 is C).

If correct, I can expect a further move up from here. That would be a fly in the ointment for the bears!

But note that we have not yet reached the Fibonacci 38% or 50% retracements, which would be entirely normal corrections in a bear move.

So it appears the picture is mixed – bearish on the larger scale, but potentially bullish short-term. In fact, a typical situation for traders!

Also, the current market rally is eating into overhead resistance between waves A and C. This may be enough to turn the market back down to cancel out the potentially bullish implications.

So how do I trade this situation?

I have a short trade taken out during the 29 February plunge, and will adjust my protective stop to a level just above the wave A high (in the chart above), which is the Fibonacci 50% retrace, of course.

If I didn’t already have a position, and if the market rallies to one of the above Fibonacci levels, I may be tempted to put out a short trade using a close stop, especially if the Fibonacci level is touched in a spike.

To cancel out the potentially bullish A-B-C labels, I would like to see a move down below the C wave. 

This morning, the odds do favour a resumption of the bear market, but with the possibility of a minor rally.

Failure of the current $1,706 area would be very bearish, as this is the exact Fibonacci 1/3 retrace of the move down off the $1,790 high! I would classify this as a shallow bounce off the $1,660 low, which would herald a probable quick move down to challenge the $1,660 low.

Trader tip: On my trading platform, the significant 1/3 level is missing, so I have to put it in by hand (and compute using my trusty calculator!). I recommend you do the same whenever the market is trading around the 1/3 and 2/3 levels.

• 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
.