What next for the rallying gold price?

With the price of gold price having to meet his targets, John C Burford looks to see if now is a good time to set a short trade.

The last time I wrote about gold on 6 January, I had taken profits from a short trade and was looking for a decent rally from the oversold condition.

I wrote: "I have drawn in a new set of up-sloping tramlines containing the rally. The touch-points are pretty good. But now at the $1,620 area, we are approaching the Fibonacci 38% retrace of the move down from the $1,800 high, the down-sloping satellite tramline, and the upper up-sloping tramline.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

"This area is marked by my 'Resistance' label in the blue box. This is formidable resistance and can be used to set another short trade."

Since then, the market has rallied to my target area around $1,640 and now I can re-draw my short-term tramlines.

Advertisement
Advertisement - Article continues below

Trader tip: Keep looking for new tramline placements as trading develops, because the old ones may stop working.

I like to look first on the daily charts, then the hourly, and then the 15-minute charts. I do this several times a day in active and volatile markets.

OK, this morning, the market is trading just above the $1,640 area. Is this a good place to set a short trade?

Here is the chart showing the decline off the 4 December high and the rally off the late December low:

12-01-11-MWT-01

(Click on the chart for a larger version)

I have drawn in the Fibonacci levels, and right away, I can see the market is approaching the 50% level. This is a very common retracement andwe could see a top here.

Advertisement
Advertisement - Article continues below

The higher level at 62% also is a common retracement area, which lies at the $1,670 level around $30 above current. I need to keep this one in mind.

Now let's take a closer look here is the hourly chart from mid-December:

12-01-11-MWT-02

(Click on the chart for a larger version)

I have now drawn in a new pair of tramlines, which I like very much. Why? Just admire the beautiful touch-points marked by the blue arrows these points lie distant from current trading and so act as very strong anchors for the tramlines.

In other words, it would take a huge effort for the market to push up through the upper tramline. Of course, this is not impossible and the implication is if that occurs,I would likely be looking at the 61.8% retrace as my target.

Advertisement
Advertisement - Article continues below

Let's now take an even closer look at recent trading:

12-01-11-MWT-03

(Click on the chart for a larger version)

As I write, the market is right up against the upper tramline in the $1,646 area (as indicated by the green arrow in the top chart). But just glance at the momentum (the green arrow on the bottom chart).

On this latest push, the momentum is lagging, and if the market decides to turn back here, that would set up a large negative momentum divergence.

The top would likely be confirmed if the market can move below the purple and yellow bars.

Of course, the market could rally further and remove this potential, but with the evidence just presented, the odds seem to favour a turn here.

Advertisement
Advertisement - Article continues below

There's something missing

But one thing is bothering me I cannot see a convincing A-B-C pattern to this rally. Recall, I prefer to see this pattern on counter-trend rallies and then to short on the higher C wave.

So one real possibility is that the market could turn down from here in an A wave, then dip to form a B wave, and then rally back above the A wave to make the final C wave (topping at the Fibonacci 61.8% retrace around $1,670, perhaps?).

This possibility is enhanced by the surge in bearish sentiment I have noticed towards gold recently.

This factor could well provide the ammunition to keep the rally alive a little longer.

Some answers to your queries

A couple of notes on queries sent in by readers thank you for all your emails:

1.The pip size for gold varies from spread-betting providers. I am using a pip size of $0.10 per oz, so that on a £1 per pip bet, a $10 per oz gold price move equates to £100 change in trading equity. Other providers use $0.01 as their pip, so a bet of £0.10 per pip is required to produce a £100 equity change on a gold price move of $10 per oz.

Advertisement
Advertisement - Article continues below

2.On a point regarding use of my 3% rule (the video will be out soon!), a reader asked about using a bigger bet size, while reducing the stop. As an example, if the 3% rule dictates that your stop is 100 pips betting £1 per pip, can you bet £2 and use a 50 pip stop? The answer is definitely not. A stop position is dictated by a sensible appraisal of the chart and the entry point. Using tighter stops inevitably leads to more frequent losses, and that is against my religion.

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 .

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/economy/uk-economy/600837/rishi-sunak-new-chancellor-spending-splurge
UK Economy

Britain has a new chancellor – get ready for a major spending splurge

The departure of Sajid Javid as chancellor and the appointment of Rishi Sunak marks a change in the style of our politics. John Stepek explains what's…
14 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

Th TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/investments/property/600826/living-on-a-houseboat-the-pros-and-cons-of-a-floating-home
Property

Living on a houseboat: the pros and cons of a floating home

Living on a houseboat sounds romantic and peaceful. But it’s not as straightforward as it looks, says Nicole Garcia Merida
14 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020