My low-risk trade in gold

John C Burford uses his charting methods to plot gold's next move, and eyes up a low-risk trade that could offer plenty of reward.

On Friday, mypost on gold posed the question: has gold made a major top at $1,787? And if so, can I identify a sensible short entry point?

To help answer that question, I used a set of tramlines together with extreme sentiment and Commitments of Traders (COT) data, as well as chart resistance in the $1,800 region.

I then pulled out one of the tricks from my bag to enter a sell-stop entry.See below forthe chart on Friday morning when gold was trading around the $1,800 level.

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I noted the potential negative momentum divergence at the $1,787 high of a week ago Friday. This gave me some encouragement.


(Click on image above for larger version)

Could new highs beckon?

Now, only 24 trading hours later, here is the updated chart:


(Click on the chart for a larger version)

The market did break below my minor support at the pink bar and my sell order was touched.

If my analysis is correct, I will expect a move down to the lowest tramline in the region of the blue bar at the $1,750-$1,755 region. That is the roadmap I will be using in the near-term.

But, as always, there is a fly in this ointment! The move down to the sub-$1,740 low has a clear A-B-C pattern, and if this is valid, it implies the rally is still intact and new highs may beckon.

I have drawn in the Fibonacci retrace levels and as I write, the market is bouncing off the 38% support, where there is also minor chart support.

This bounce is entirely normal and to be expected.

The big question of course is: is the A-B-C real, and will we see new highs?

Luckily, in Elliott wave theory, we have a definitive level where this question can be answered.

Picking a low-risk trade

The rally high on Friday at $1,783 lies just below the previous Friday's top at $1,787 and is a very deep retracement. But the key point is that $1,787 was not exceeded. That keeps the odds of a big market turn still in my favour.

Now, if we do see the $1,787 level taken out on this rally leg, that will unequivocally mean that the top is almost certainly not in, and the A-B-C dip is simply a continuation pattern in the on-going rally.

But for a swing trader, there are two key points on any trade, firstly it is not "am I right?", but "what is my maximum risk on this trade?" And secondly a trader should ask: "what is my likely profit?"

Here, we have a short trade in the $1,778 area and our protective stop is just above the recent high around the $1,787 level. That is a risk of a miniscule $10 or so.

In the context of the spiky gold market, this is microscopic risk! See what I mean about picking low-risk trades?

As stated, my first downside target is the $1,750 region, giving a potential reward/risk ratio of more than 3-to-1. That is a good short-term trade, no matter how it turns out.

And if I have correctly identified the top, larger profits await.

The most emotional market of them all

The market is toying with the important $1,800 level. Typically, markets make several unsuccessful attempts at pushing up through such a level before the question is answered. We shall soon see whether this level will hold or not.

I wish to thank all of my readers who posted comments on my emails. Last Friday, I provoked quite a reaction; take a look here to find out what readers have been posting.

It bears out what I have long said the gold market is the most emotional market out there, with the bulls often defending their beliefs to the death.

I would remind everyone that there are no certainties in the markets. I saw gold shoot up exponentially in the late 1970s to hit $850 a level that was not exceeded until 2008 28 years later. A sobering fact for anyone, surely?

I write about swing trading methods, not about very long-term investing.Many comments are related to the long term. And I have no problem with anyone owning gold in their portfolio. That is entirely sensible. But after an exponential rise this year, is it rational to be loading up at current levels? Or is it an emotional decision?

For those of my readers who are attending one of this week's workshops I very much look forward to meeting all of you and trust you will have a very enjoyable and profitable day. We will be spending a lot of time analysing current charts and even choosing trades and you will be able to see how I work in a live environment.

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 . If you have any queries regarding MoneyWeek Trader, please contact us here.

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.