What now for gold?

Market developments are coming thick and fast this week. So I thought I would follow up my analysis of gold today, which fell heavily yesterday.

Yesterday saw sheer carnage in many markets – copper fell 5%, crude oil 5%, and silver 8%.

These commodities are the ones that are most sensitive to the state of the world economy. These moves are, of course, highly deflationary.

Adding to the deflationary theme, US interest rates are falling to new lows again, with ten-year Treasuries falling below 2% – a level not seen for over 50 years.

So much for a collapsing dollar, as most pundits have forecast!

Back to gold. In yesterday’s post – written early morning – I laid out my view of the Elliott wave count off last week’s spike high at $1,760. This is the chart I showed then:

Gold spread betting chart

(Click on the chart for a larger version)

I had my wave 5 right on the lower tramline, and the market was attempting to make a relief rally. I was hoping for an A-B-C pattern where I could add to short positions.

Alas, it was not to be – and therein lies an interesting lesson in tramline trading.

I had my first downside target in the $1,600 area – and that was quickly hit (and exceeded) yesterday.

But in the process, there was no A-B-C rally, and the market was so weak that it plunged below my wave 5 low and crashed through my lower tramline, thus spoiling my Elliott wave count – and tramline placement!

But it was a nice problem to have, of course, as I am short.

I have to redraw my tramlines

When the market made its low in the $1,565 area and staged a bounce, I needed to see if I could re-draw my lower tramline. This was the result:

Gold spread betting chart

(Click on the chart for a larger version)

The line through yesterday’s low (marked by blue arrow) also took in the significant high from Monday (marked by yellow arrow). That is pretty, and is in accordance with one of my guidelines for tramline placement (see my video tutorials).

So this is the one I shall use now.

Gold spread betting chart

(Click on the chart for a larger version)

Note also the very oversold momentum reading at the low (marked by blue box).

If I were a short-term trader I would have taken profits near this low, as the odds strongly favoured a relief rally ahead, looking at a gain of around £1,400 for each £1 bet in less than a week from their short sales in the $1,720 area.

OK, so if the $1,565 level is a low, can I finally expect an A-B-C relief rally?

Recall from yesterday’s email, that I believe we are in the early stages of multiple third waves. These are the most powerful waves of all – and take no prisoners.

My reading this morning is that rallies should be short-lived – we may well see an A-B-C, which may top out at the underside of my original lower tramline in the $1,585 area.

But if this line of resistance is breached, resistance lies at the upper tramline in the $1,620 area. I put this possibility as a low-probability event.

But with these very volatile markets, we cannot rule anything out.

The key for trading is to observe your money-management rules – and keep disciplined. Capital preservation is paramount.

• 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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