What will gold do next?

There are significant developments in all three of my major markets this week.

But with all eyes on the stunning collapse in gold, I will concentrate my attention here… and my conclusions may surprise you!

When I last covered gold on 10 April, I posted the daily chart showing the widely-watched support at the $1,525 area:

Gold price spread betting chart

(Click on the chart for a larger version)

Then, I suggested that the market may have more to go on the upside after rallying from the $1,540 level:

Gold price spread betting chart

(Click on the chart for a larger version)

But as I mentioned, this rally had a classic A-B-C form with a clear negative-momentum divergence (red bars) between the A and C wave tops. It was also trying to eat into the solid overhead resistance (pink bar).

I suggested that many traders would be shorting on this signal. I wrote: “Because of this, here would be an excellent place for short-term traders to take a major profit of around 400 pips… and for other traders without a position to look to short!”

And how right they were!

What a collapse! I’m sure you have all read the gory details in the media.

As you know, I have been a gold bear since the 2011 high at $1,920.

Back then, I projected a very long-term target under $500. That was mainly due to the coming deflationary scenario I envisage.

But that is of no real interest for swing trading, which is the style I cover in my posts.

Please don’t confuse the long-term picture with the short-term. As swing traders, all we ask is for a decent swing in either direction! And sometimes, that swing will go against the major trend.

Let’s take a cold hard look at the market

OK, with the $250 drop in just one week, it is time to cool off and take a cold look at the state of the market.

Gold is the most emotional of markets, and because it attracts many traders who hold passionate views, the swings are enormous – and ideal for swing trading.

Naturally, if you were one of the many who were on the long side, you will be nursing losses. But if you had been employing my 3% rule, you would have been kept out of major trouble. And that is the number one task for all traders.

If you can avoid a catastrophic loss, you have a fighting chance to win as a trader. But all it takes is one huge error in money management and you are out of the game. This must not happen to you.

Here is the weekly chart over the past six years for the big picture:

Gold price spread betting chart

(Click on the chart for a larger version)

I have drawn in the Fibonacci levels using the last major low in 2008 as a low pivot point – and right away, I can see the plunge has made an almost direct hit on the 50% Fibonacci level. This is interesting!

Also, momentum has fallen to a level not seen for at least six years. Also interesting.

Are you starting to see where I am going?

 

Now let’s see how the various players are lined up from the commitment of traders (COT) data. Here is the latest set as of 9 April:

Non-commercial Commercial Total Non-reportable positions
Long Short Spreads Long Short Long Short Long Short
OPEN INTEREST: 416,513
COMMITMENTS
203,812 84,453 23,873 135,855 279,657 363,540 387,983 52,973 28,530
CHANGES FROM 04/02/13 (CHANGE IN OPEN INTEREST: -663)
1,178 2,025 -1,211 -1,350 -70 -1,383 744 720 -1,407
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
48.9 20.3 5.7 32.6 67.1 87.3 93.2 12.7 6.8
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 354)
183 87 79 59 49 274 189

This snapshot was taken last Tuesday, well before the crash, so it is not revealing much new information – the hedge funds (my mortal enemy) are still massively long.

I think the next report as of yesterday (to be released later this week) will definitely show a few changes!

Has gold made its major low?

I have been scanning the media and overwhelmingly, they are now calling gold in a bear market, since it is down over 20% from its top. I wonder which planet they have been living on, as to my mind, the bear market started in 2011.

The important point is that the media are whipping up a very negative mood, and there are many doom-laden forecasts being bandied about. This is usually the time when markets perform their time-honoured task of surprising the majority.

After all, gold did it to the bulls, will it now do it to the bears? There must be many Johnny-come-latelies that jumped on the bear wagon in the past few days dreaming of much lower prices.

This is entirely predictable after most in the media had been extolling gold’s virtues to the skies – until less than week ago, that is.

One other point for those who trade off the ‘fundamentals’, using such data as mine production, central bank sales, coin demand, Indian jewellery demand and so forth. I imagine not much has changed in these areas in the past week, yet the market plunged by $250. How to explain that using fundamentals?

Putting all of this together, I am trying to make a case that gold has made, or is very close to making a major low.

What evidence can I find for this view?

Let’s zoom in on the daily chart:

Gold price spread betting chart

(Click on the chart for a larger version)

Here, I discover a terrific tramline trio, where the market sank right to the lower line. That is very pretty, don’t you think?

And this morning, the market is staging a relief bounce as I write.

OK, let’s see what the 15-minute chart can tell me:

Gold price spread betting chart

(Click on the chart for a larger version)

I have drawn in one set out of the many possibles. And I have a nice positive-momentum divergence at the $1,330 low which signals a probable reversal.

I have a wave up and then a wave down and we are currently in another wave up. This has the hallmarks of an A-B-C and a likely target for the C top is in the $1,440 area – and possibly higher.

The key to a long trade is, of course, avoiding another sharp leg down! That is where stop losses come into play, of course.

And here is another thought: A much more outrageous possibility is for the market to rally back to my centre tramline in the $1,530 area. And with the market deeply oversold – and psychologically bombed-out – this is not out of the question.

But there is no doubt that if you can get your timing right, the gold market offers riches galore.

• 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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