Gold is toying with us

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This will be a brief follow-up to my last post on gold on 24 October. I’ll illustrate how I use Fibonacci to project support/resistance levels and then use Elliott wave theory to pencil in a likely path for prices in the near and medium term.

Last time, I showed the daily chart (below), showing the large decline off the $1,796 high of 4 October.

I had two separate Fibonacci sets derived from two separate low pivot points and projected a support zone surrounding the two Fibonacci levels in my pink zone.

I also forecasted a bounce up from support and then a fresh decline to eventually take the market below this support. Beware - the red lines in the chart are not to scale!

(Click on the chart for a larger version)

And this is how the market has developed:

(Click on the chart for a larger version)

The market has indeed found support in my pink zone and is staging a rally. But so far, this rally is very weak. Is this a worry for the bulls?

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Let’s zoom in on the hourly chart:

(Click on the chart for a larger version)

I have drawn the Fibonacci levels using the most recent significant high at $1,752 as my high pivot point.

And the market has only managed to reach the 50% level, so far. I have drawn in the A-B-C form to this rally (red lines).

Remember, an A-B-C rally form indicates that the larger trend (down) remains intact, and we should be trading from the short side.

So, at first glance, it appears the bounce has run its course, and we can expect an imminent plunge below the $1,700 level.

A line in the sand

But, as ever, we must also consider alternative probabilities – and here is one:

(Click on the chart for a larger version)

I have an excellent tramline pair, complete with a prior pivot point (PPP) on the upper line. The market is currently testing support at the lower tramline at the $1,709 level.

So I have a line in the sand for this interpretation: if the market breaks support here, my original scenario will be playing out, in all likelihood. But if the market rallies off current levels, that would strengthen the alternative scenario.

I will not have long to wait for the resolution, as the important US October Non-Farms Payroll data will be released later today.

How can markets suddenly change direction?

Flash news: The employment data is now out and appears very bullish for shares and bearish for gold, with the market crashing below the $1,700 level. The resolution has arrived.

Sentiment drives markets, not data. It is the consensus interpretation of data that is the guiding force. And I have shown in these posts that when consensus is heavily to either the bull or bear side, that is when we should expect a major trend change, and I have given many examples in real time.

If sentiment reverses sharply, the market can very quickly reverse with it.

At workshops, I often get questions asking me how can a sudden change in sentiment occur. After all, bullish sentiment, say, is built up over time with due consideration by the market players. The strongly bullish interpretation of data gathers more and more adherents until the market shows a distinct upward trend.

So how can this mass belief in the rightness of the bull position change almost overnight? Surely, there are few sudden unexpected events that can cause this? Most ‘sudden’ events can be forecast well in advance!

Recently, I came across a modern-day Aesop fable – appropriate as winter approaches.

Imagine a pond that has frozen overnight. Before, there was no ice on the pond, but suddenly, the situation has changed. An early riser on his walk sees the ice and eagerly decides to get his skates out of the garage – and call his friends to join him.

At first, they gingerly step onto the edge and find the ice is thick enough to support them. Then, as word spreads, more people join them and soon they are all having a wonderful time, even displaying moves they haven’t done in years. What could possibly spoil this party?

But the ice is getting crowded. Someone becomes nervous that the ice will not be able to hold them all. He tells his friend he is worried, but is told not to worry – don’t be a party pooper! So he stays.

Then, just as one more person steps onto the ice, loud cracks are heard. Some make it back to land, but most fall into the water as the ice gives way.

Think about that these cold November mornings!

• 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 sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.

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Published in Spread betting blog More articles by John C Burford