The latest gold dilemma

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After very large declines this week in the Dow, the trades I have recently described in gold and to a lesser extent the euro are going to plan. That means I have few new lessons to relate today! It is a question of keeping one eye on likely support zones where rallies can be started and short-term profits can be banked.

But gold is presenting me with a little headache, albeit one that most traders would like.

The problem I have is this: where are the best Fibonacci pivot points I can use so that I have a clear idea of support zones? 

In particular, which significant low can I use for the low pivot point? The top pivot point has already been presented – the 5 October $1,796 high.

Here is the daily chart:

(Click on the chart for a larger version)

I have circled some possibilities – there are at least eight candidates! First let’s go to the most recent (far right-hand circle) – after all, this is the first low put in following the upside breakout of the summer’s trading range.

And we must use the $1,530 low (far left hand circle) for another Fibonacci set, as that was a true low:

(Click on the chart for a larger version)

I have combined both Fibonacci levels on the same chart.

Using the 31 August low Fibonacci, the current market has hit the 62% retrace. Hmm.

And using the $1,530 low Fibonacci, the 38% retrace lies just below.

That means there is significant support at around current levels, or slightly below (marked by pink bar).

If so, we should see a bounce soon. I have put a likely path on the chart by my red bars.

Now, if this occurs, we could have an A-B-C (corrective) pattern, or alternatively another five-wave sequence. Time will tell.

Of course, we could see a further plunge through this support, as weak longs continue to abandon ship.

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What time frame are we working on?

In terms of tactics, that would depend on whether you are trading short-term or long-term.

If short term, you would be looking to take profits ahead of the likely bounce. Since the entry was at the $1,775 area that would be a very tasty profit.

If trading long-term, you would be looking to add to short positions as the bounce (hopefully) turns around.

This brings up an interesting point. If someone asks me if I am bullish, bearish or neutral on gold, I would ask “Which time-frame are you referring to?”

I might say that for today I am slightly leaning towards a bull stance. But over a week’s time-frame I would say I am neutral to bearish. And over a month I would say I am bearish.

Why I’m cautious of the bullish market mood

OK, I have repeatedly stressed how distorted the trader sentiment and Commitment of Traders (COT) figures have been recently. Let’s see what they say.

(chart courtesy elliottwave.com)

The three coloured lines are the futures holdings from the COT data of the various trader groups.

Note the huge increase in longs by the Large Specs (hedge funds and exchange-traded funds (ETFs)) and the public since the upward break-out in late August. All the while, the trade have been selling to them.

With near-record long positions by the Specs persisting, the downside potential is huge. A bottom will only be reached when gold is considered washed-out with greatly reduced long positions by the Specs.

I do scan the blogosphere for the mood of the market, and have recently noted an increase in very bullish forecasts ranging from $2,000, $2,500. I have even seen $5,000!

Polled sentiment readings have also been at record bullishness recently.

That evidence was crucial in my forecast for a top. Remember, major turns are always accompanied by sentiment extremes.

Trader tip: Do not get caught up in the feverish excitement as markets rally to a top. Learn to switch your thinking around and ask: “If every man and his dog are buying, do I want to be in that group?” 

As we have seen in the past three weeks, a small dip off the $1,796 top (normal profit-taking) has turned into a much more significant event with the market yesterday $90 off its high.

Now, many will be eyeing this dip as an opportunity to buy. That is perfectly understandable. Many have seen gold soar and have either not been on board, or have decided they do not hold enough. This seems a heaven-sent chance to correct matters.

And that is what makes the markets!

• 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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Published in Spread betting blog More articles by John C Burford