Gold rallies to important resistance levels

published 5 December 2011

In my last article on gold, I had pencilled in my Elliott wave count on the decline from the 13 November high at a little under $1,800 an ounce, to the recent $1,670 low.

I labelled that low as my wave 3. A wave 4 rally then followed. I was looking for a drop from there into wave 5.

The market did decline off that wave 4, but failed to make a low under $1,670.

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Below is the chart showing the truncated fifth.

When the market moved up off that wave 5 low and took out the wave 4 high that was the clue that all was not right with my first analysis.

I had expected a consistent decline going into the latter half of November. But it was not to be.

My short sale was protected by my break-even stop - I had moved my protective stop down to break-even while the market was making wave 5.

(Click on the chart for a larger image)

Trader tip: My break-even rule has kept me out of many potentially losing trades I recommend its use for all traders. The number one rule for traders is to protect your capital as much as possible, but to give your trades enough room to produce the big winners.

So where to now for gold?

Since the gold market has been strongly correlated with the US dollar - and stocks - when the euro and stocks rallied off their 27 November lows, gold followed suit.

So now, let's look at the daily chart:

(Click on the chart for a larger image)

Last week's rally to the $1,760 level (marked by the yellow arrow) took the market to the major downtrend line. Moving above this line would require a major push.

Gazing at the current hourly chart now:

(Click on the chart for a larger image)

I can note several important points from the chart:

At last week's $1,760 high (marked by the top green arrow), the market had retraced an exact Fibonacci 76% of the decline off the $1,800 high - this is a typical reversal point.

There is a clear A-B-C - corrective - pattern to the $1,760 high.

There is a clear negative momentum divergence between the A wave and the C wave (marked by the bottom green arrow) - this is normally a sign that the C wave is weak and the market is ready to reverse.

The $1,760 high lies right on the major downtrend line, as shown in the first chart above.

So, the odds are stacking up that the $1,760 high is very likely a major top (at least, for now).

How to play this? A short sale could have been made near that $1,760 high with the knowledge provided by my list above.

Failing that, I will bring in my standard entry method - to short on a break of minor support. Here is the 30-minute chart:

(Click on the chart for a larger image)

I have minor support at the levels shown by the pink and blue bars. These supports are at levels that have recently acted as supports. So any break of them would normally be significant, and is where sell stop-loss orders are concentrated.

Because of the on-going eurozone developments this week, we could well see a pick-up in volatility, and even a surge to new highs if stocks get wind of a better crisis management outcome.

That is why I am trading lightly at present in these skittish - and highly political - markets.

But that could all change in an instant! As traders, we must be alert to the signals the markets are sending us, and they could come at any moment.

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:

Advanced trading with Elliott waves

An introduction to Elliott wave theory

Trading with 'momentum'

The essentials of tramline trading

Advanced tramline trading

Trading with Fibonacci levels

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 .

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.