Home—Online trading—Spread betting explained—Spread betting blog—Gold follows the tramlines lower
Jul 18, 2012, 03:26
Posted byJohn C Burford
If you’re trying to make money using my methods, do please read today’s issue.
I’m following up on my last gold article from 11 July to help you see these tools in action. Gold right now is a great market to learn from.
That’s because it clearly illustrates how I use the three pillars in my methodology – Elliott wave analysis, Fibonacci retracements and tramlines – to identify low-risk trades.
As you know by now, I’m treating gold as in a bear market for my swing trading purposes. The all-time highs were made about a year ago at $1,920, and the market has been working lower ever since, albeit with very wide swings.
If you’ve been following MoneyWeek Trader in the past year, you’ve seen how I’ve been trading it successfully from the short side. And until conditions change, I will continue in this vein…
That’s not to say that there are no swing trading opportunities on the long side in gold. Of course there could be. But I will say that in a bear market, since the trend is your friend, better results can be expected from the short side.
Also, even a quick glance at the charts will confirm that declines are most often sharper than rallies.
As is sometimes said, gold can fall out of the window faster than it can climb the stairs.
And if I can capture a decent swing on the downside quickly, I can release that capital to search for more trades.
Note that I have not mentioned a word about fiat currencies! I understand the rationale of the bulls’ argument that recent money-printing has ‘guaranteed’ a loss of their value against the gold price. That’s fair enough.
But what they do not take into account is the massive debt worldwide that requires servicing, which is deflationary and will at least partially cancel out – or swamp – the inflationary effects.
The bottom line is that successful traders do not hitch themselves to any particular wagon in terms of the fundamentals. That’s key.
I watch the sentiment readings, and when sentiment reaches an extreme – either bullish or bearish – that is when I start to look for opposite trades. That way, I can often identify lows and highs to take my low-risk trades.
But please don’t get me wrong. For an individual investor, for insurance purposes – as distinct from swing trading – holding physical gold makes a lot of sense. Remember, MoneyWeek Trader is about trading. But if you have a strong view on gold, leave a comment at the end of the article.
OK, let’s get back to the charts. Recall that last time I had identified another shorting opportunity:
(Click on the chart for a larger version)
The market had retraced a Fibonacci 50% and was teed up for my trade in the $1,580 area. My stop was placed just above the Fibonacci 62% level at the $1,585 level for a very low-risk $5 maximum loss to my stop.
Let’s see how it panned out:
The market did decline off the $1,580 area and made a new low below $1,560.
Now, I needed to revise my Elliott wave count with this new low – and at my new wave 5 low, there is a large positive momentum divergence, indicating a weakening of the selling pressure.
That was a good place to scurry for the exit! After five waves down comes a corrective rally, hopefully in an A-B-C format. And that is what I was looking for.
This is this morning’s chart:
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This chart contains several important points.
1. When the market embarked on its strong rally last Friday, I decided to look for tramlines. I drew in the central one first, capturing the important highs of 5 and 10 July. I then drew the lowest one, which was not altogether satisfactory, but let it go for now. Then the highest one – and yesterday, the market bounced off it very sharply.
2. The rally is in a clear A-B-C with a negative momentum divergence at the C wave high. This is strong evidence for a turn, which occurred.
3. The decline yesterday moved below my B wave low, confirming the short-term trend is now down.
So a short anywhere near the C wave top was a good candidate for a low-risk trade.
But then, I had another look and discovered another set of tramlines which I think is more satisfactory:
My lowest tramline has a nice prior pivot point (PPP), and contains three superb touch-points. And the break up through the centre tramline was followed by two pull-back kisses (green arrows).
My maximum target is thus the highest tramline, which lies just below my C wave top.
Trader tip: You can often find competing tramline sets on the same chart. My first attempt was not entirely satisfactory – but it did identify yesterday’s high, so it is significant. My second set is prettier, but will it be just as valid? Time will tell.
But are there any shorter-term tramlines that give me some more clues?
Take a look at this as we zoom in on the last ten days:
This is a close-up of the rally – and indeed I have found four good up-sloping tramlines.
Note also that the C wave top occurred at the Fibonacci 62% retrace, as shown – another reason to look for a top there and a shorting opportunity.
Why not go over this chart yourself to find the PPPs, the kisses, and look for possible low-risk entries?
The market appears this morning to be heading towards my long-standing $1,530 target area. But I always keep a weather eye on the bigger picture:
I’m sure all the gold bulls have spotted this potential wedge pattern! Of course, an upward break above the upper line would be bullish – but we are about $100 beneath at present.
For now, all I can say is that we are trading between the lines, and a break of either would send the pigeons flying! Meanwhile, I will try to capture the swings on the downside.
Do you have a view on gold? And are you prepared to trade it from both the long and the short side? Please share your thoughts below.
• 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
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Published in Spread betting blog
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Leave a comment
(18 July 2012, 08:32PM)
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Yes the "triangle" is a bullish sign when appearing in an uptrend( which gold is in since 2001) but this one would inspire more confidence if the base was sloping up and with a flat top which is normally to be seen and then usually resolves to the upside. I day and swing trade the Dow and buy and hold gold only. As I have mentioned before the Dow/Gold ratio charts point to a" big" disconnect coming where the Dow and Gold go in opposite directions. I would like to know what you think on this John.
(18 July 2012, 08:38PM)
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again great commentary john-and as i've said before,at least you take a position, which is what it's all about surely.i'm ok with applying fib to obvious swings and i can spot good tramlines but which fib and what stop?-oh well keep on trying-i don't suppose any one answer covers it!--btw can someone enlighten me,does the expression'covering a position' mean closing posn and taking opposite stance or keeping posn open and also taking opposite posn-ie short and at same time?-good luck
(19 July 2012, 10:53AM)
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JohnThank you for your daily email, it is one of those that I do make a point of opening.Those individuals like Dent and Prechter who predicted our present situation a decade ago both see gold going much lower. Both of them however seem to be caught out by the amount of central bank printing that has taken place. Holding gold as your colleagues at Money Week often argue is an insurance for the times when(or if) the central banks lose control. Even if on believes in the gold at $5000 oz story I doubt it will go up in a straight line, in the meantime it has been useful to use spread betting to hedge my gold holdings when it feels overvalued. It looks like we are close to the end game on the wedge pattern? Look forward to your future emails on gold.Regardsb
(20 July 2012, 12:34PM)
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Had a quick read through regarding gold which is a market I don't (yet) trade. I'm not sure about your ABC labels John. So far as the wedge analysis is concerned, I'm seeing B as just complete with the chart now turning up into C?
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