Gold follows my script, but spikes to resistance

Last Wednesday, I had just completed a very nice short trade, as the market fell in five waves down to the $1,710 area.

This followed my analysis that indicated that the 2 December $1,760 high was a major top.

And because, according to Elliott wave theory, a five-wave pattern to the downside indicates that the larger trend is down, so following the completion of the fifth wave, a relief rally can be expected.

I speculated that this rally would be in the form of an A-B-C pattern. My preferred upper target for the C wave was the $1,740 area, or slightly above.

Following that email, the market did fall back to the centre tramline and then rallied – but spiked to a high at $1,757:

Gold price spread betting chart

(Click on the chart for a larger version)

That spike took the market very briefly above my preferred target zone. I had set my short trade just above $1,740 and was taken out for a loss on my protective stop as the market spiked.

That was unfortunate, but gold has the well-earned reputation of being a ‘spiky’ market – this was another great example of this behaviour.

Be quick to get back in, if indicated

But when I saw the market suddenly reverse from the $1,760 area (marked by the purple bar in the chart below), I knew that that level was very important, and that my belief that this level represents a major top was correct.

I then put out my short positions again, as it was very unlikely that the $1,760 level would be breached.

Trader tip: Never be unduly influenced by taking a loss. Keep your eyes on market action, as any form of negativity in your mind could prevent you from entering a winning trade.

Note also the very large negative momentum divergence (marked by green arrows on the chart above) – another clue that the downtrend was about to resume.

Technically, the momentum divergence on this spike C wave indicates that the C wave rally was weaker than the initial A wave.

By weaker I mean that the impulse to buy in the C wave was less than that in the A wave.

Normally, the A wave buying comes from much short-covering (profit-taking), as well as some bullish ‘buy-the-dip’ buyers.

In this C wave, most of the short-covering has taken place, and it is weak longs who are propelling the market upwards.

These are bulls that missed the first A wave, have seen the dip in the B wave, and now are scrambling to get on board so as not to miss the ‘bottom’.

Many of these new weak longs are setting their protective sell-stops clustered around the B wave low. When that level is breached, these longs sell out at a loss and provide the ammunition for further sharp falls.

As of this morning, that is exactly what we are seeing.

Trader tip: Try to assess the relative weakness of the bulls and the bears as the market moves along, as in the above example. Try to put yourself in the position of a bull or a bear and work through their thought processes. In the words of The Art of War: “Know your enemy”!

OK, so where are we this morning?  Here is the hourly chart:

 Gold price spread betting chart

(Click on the chart for a larger version)

The market has dropped back to my central tramline, which is, of course, a line of support. This support may give way at any time.

So, where now?

Here is the longer-range chart:

 Gold price spread betting chart

(Click on the chart for a larger version)

All of the relevant Elliott wave guidelines and rules for corrections to a bear market are in place, and it appears the market is heading towards my targets.

The pink bar is my first target ($1,670 area), and then on to my second target (blue bar) at the $1,600 region.

I shall be looking to add to short positions on any rallies.

Trader tip: If you believe you are near the start of a large move (up or down), an aggressive trading strategy is to add to positions on counter-trend moves in order to build a big position. In this way, very large gains can be made, but only if you get your exit strategy correct – and that is the hardest thing of all in trading!

Incidentally, many believe that gold is traditionally a hedge against economic turmoil, as well as inflation. When there is much money-printing, and economic uncertainty, as we are seeing today, then buy gold, as the story goes.

Nothing could be further from the truth. Take a look at the charts of gold set against the Dow – they are highly correlated! 

It is the waves of liquidity in the banking system that determine these markets. When money leaves stocks, it also leaves gold.

In an economic collapse, there are no hiding places.

• 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

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