The gold market just got very interesting

This morning I awoke to news that the US intends to intervene militarily in Iraq. Politics is not my beat, and I will not comment on the fiasco of Western involvement with that blighted country. But the impact on the markets is being felt already with a flight to gold (and the US dollar).

Compounding the negative news, Russia has just imposed its own sanctions on the West by banning food imports. This will hit share prices hard. Who knows how this will escalate.

All of a sudden the mood is turning more and more negative, and this is being reflected in the massive falls in global stock markets. Remember, stock markets are driven by social mood. But how quickly mood can change! Trade sanctions are simply a reflection of the worsening sentiment around the world.

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Bear markets are associated with increasing tensions between nations and also between religions (vide Iraq) and between even smaller groups (Scotland's independence vote). Bull markets reflect an expansive impulse and are associated with a coming together and a burying of differences (vide the European Union).

In July, the mood was off-the-scale positive with gold being shunned, stocks embraced, and most pundits were lauding the UK and US economy's recovery as revealed in the latest data.

Another month, another market. Now in August, mood is souring and its most sensitive barometer the stock market is collapsing as I write.

The best way to enter a trade

My original b wave low was not correct, because the market made a new low in late July. I tentatively set the b wave low there and suggested that if the market could break up out of the small triangle (green lines), that would confirm my new label placement.

This is what I wrote then: "With the market zigging and zagging, it would not surprise me to see a continuation with no clear direction, although a sharp move up out of the triangle could herald a move to my upper tramline. Then, gold would definitely get very interesting".

And later on Wednesday, gold definitely became very interesting!

One possible trade was to enter a buy-stop just beyond the upper green line in anticipation of a possible break-out. I find that it is a terrific way to enter trades when you have a clear plan, rather than waiting for the market to make its move.

If you do that, then there are all sorts of ways life conspires to prevent that trade, such as not being near your screen at the time of the break-out. And of course, there are the inevitable shall I, shan't I' thoughts racing through your head!

Getting your order resting in the market can avoid all of these negatives. I strongly advise using this method for trade placement.

My best guess scenario

Note that my new b wave terminated at the precise Fibonacci 62% retrace of the a wave yet another superb demonstration of the power of using the Fibonacci levels in your trading.

Now that the market has broken up through my upper tramline in my c wave, what is the outlook from here?

Let's zoom in on the c wave:

I have drawn in the Fibonacci levels for the b wave and as I write, the market has hit the 62% level, which is a typical level where the market makes a turn.

Action in the last two days is impulsive and this makes me think it is a third wave. Remember, third waves are usually long and strong, which this clearly is.

When this third wave exhausts, it will enter a fourth wave down. Where this third wave ends is uncertain, but the $1320 area is a great candidate, because it lies at the Fibonacci 62% level. And when the w4 terminates, the market will likely rally in the fifth wave.

My ultimate target is the waves A-C line in the $1,350 area and above the a wave high.

Gold has burst out of the zig-zag trading zone and made a direct thrust up. This is what happens when the market coils like a spring!

The silver market remains sluggish

Silver has hardly moved off the Fibonacci 62% support level. The reason? Silver is an industrial metal and is not as attractive as gold as a safe haven when global conflicts erupt. I believe the relative massive underperformance of silver is telling us that stock markets are in for a very rocky ride.