Your roadmap for gold

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Before I cover gold today, I wanted to drop you a quick note on my GBP trade from Friday, as it confirmed my forecast for an increase in bearish sentiment last week.

You’ll remember that I had a long trade working. But the market was hit very hard again, stopping me out at break-even.

I showed the Commitments of Traders (COT) data as of 22 January and my forecast was that the speculators, who were busy accumulating huge short positions, would be increasing them further, since the market had fallen further. 

The extension of the decline since that date would virtually guarantee it!

Here are the updated figures as of 29 January:

Non-commercial			Commercial		Total		Non-reportable positions
Long	Short	Spreads	Long	Short	Long	Short	Long	Short
OPEN INTEREST: 166,060
COMMITMENTS
57,989	47,367	3,248	85,116	84,976	146,353	135,591	19,707	30,469
CHANGES FROM 01/22/13 (CHANGE IN OPEN INTEREST: 5,240)
-2,212	5,104	1,095	15,217	-8,312	14,100	-2,113	-8,860	7,353
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
34.9	28.5	2.0	51.3	51.2	88.1	81.7	11.9	18.3
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 98)
25	30	9	25	30	53	66

In particular, the small specs (non-reportables), were piling in with both feet last week. 

Remember, this is typically what happens near the end of a run – the specs get even more excited after a run has been in progress for some time.

That means I am on the lookout for another tradable low. I hope to report on this in upcoming posts, provided I see some great tramlines, Fibonacci levels, or Elliott waves of course.

I don’t want you to fall into this trap

It is the sentiment extremes – a universal feature of the herding instinct – that creates the highs and lows. These extremes are definitely not created by the ‘news’.

That is hard for many novice traders to accept. Most people come to trading with the conventional view that it is the news that is all-important and that if they follow enough of it, they can conquer the markets. Sadly, experience tells us that this is incorrect.

How many times have you seen a ‘bullish’ report come out just as the market nosedives? Of course, after the event, people find all sorts of rationalisations to explain away the inconsistency. The vast majority of ‘opinion’ falls into that category.

I do not want you to fall into that trap. We make our money by anticipating the moves – and the sentiment readings are just one of several tools that I use.

A moment’s thought will convince most that when the vast majority are bullish and have taken long positions, only a small degree of selling could turn the market as piles of sell stops are hit. That is the degree of unbalance that professional traders look to exploit. 

The other aspect is this: In a bear run, who are the crazy people doing the buying from the bears? Here, in the GBP/USD market, these crazy people are the commercials (such as banks and trade houses). Many have been around the block a few times and have survived many bull and bear markets. That is why they are considered the smart money. Do you want to bet against them for an extended period?

Yes, you can make money trading with the herd – for a while. But at some point, the boat will tip over. Will you be one of the survivors who got in the lifeboat early and saw the danger before the others?

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This roadmap can guide my trading

OK, back to gold. Last Wednesday, I showed some short-term trading opportunities in gold based on Fibonacci retracements. Then, the market was staging a rally and I had chickened out of my long trade, and was asking whether I should initiate a new short:

(Click on the chart for a larger version)

The rally had carried to a precise Fibonacci 38% retrace (red arrow), which could be a possible turning point. However, I did hold off because my A-B-C (green bars) did not look terribly solid – my B wave was not definite enough.

And that was a good decision!

The market rallied further – and right to the Fibonacci 76% level (purple arrow). That was a much better entry, of course.

That was another possible Fibonacci trade.

As it happened, I sat on my hands, suspecting a volatile period ahead. This is the current chart:

(Click on the chart for a larger version)

And what a choppy market! Up until then, I did not have enough on the chart to enable tramlines to be drawn – but now I do, in spades.

I have a superb prior pivot point (PPP - red arrow) on my upper line, and precise touch points in upper and lower lines. That is remarkable, since in gold, I often have to deal with throw-overs when drawing tramlines.

With these tramlines, I now have a roadmap to guide my trading.

This morning, the market was heading down to hit my lower line. I will be ready to trade when that occurs.

• 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