Interactive Investor

Chart of the week: When this bull run will resume

8th May 2017 12:36

John Burford from interactive investor

The outlook for Randgold remains bullish

The recent collapse in the gold price has reached front page news. On 17 April - a mere three weeks ago - gold was trading at the $1,295 (£1,000) level. Then, the severe collapse started and by Friday's close, the market was trading at $1,225 - a slide of $70. Naturally, that has hit the miners hard.

So today I wish to follow up my coverage of Randgold that I left on 3 April. In particular, I will show that my forecasts on that date are being played out in grand style.

Remember, I am assuredly not using in my analysis any fundamental data of supply/demand, gossip, rumours of secretive bearish forces at work, Fed action (or inaction), or anything other than the charts of price and time action combined with sentiment readings.

Most of what is written on the gold market (in fact, on all markets) is pure bunkum. Authors concoct a 'story' - some more plausible than others - and because 99.999% of readers still adhere to the false paradigm that the news drives the markets, these accounts are lapped up. Some of the authors become famous gurus.

The problem is that these stories are published only after the market has made its dramatic move and is of little or no value to a trader who wishes to make profits from these market moves. What that trader needs is a method whereby he/she can anticipate the moves correctly - and grow their account accordingly.

But these post-move rationalisations do have some value to me, and I read them avidly - but only to get a measure of trader sentiment. If I see lots of bearish articles on gold after a significant slide - as I have recently - my sentiment antennae start twitching as if in a St Vitus dance. And when all seems lost in these articles, I know bearish sentiment is off the scale and I can start looking to buy in true contrarian fashion.

Back on 3 April, this is the daily chart I posted:

 

I noted the shares had made a high in early March near the £78 level, but on a momentum divergence, indicating the rally was likely running out of steam. I had drawn in my tramlines (the two upper blue lines) and when the market broke the centre tramline, I was able to pencil in the likely outcome in an A-B-C form with wave C turning at either the Fibonacci 50% (£68) or the 62% (£63) levels.

These possible targets were marked on the charts because I had anticipated a slide down to one or both of these levels.

So has my forecast panned out? This is what I wrote on 3 April:

I have drawn in T3 and this morning the market is testing that support. But note the yellow bar - that highlights a significant zone of support and resistance in alternate periods. At present, the market is also testing that support in the £68 - £70 area. So today, the market is resting on that major support. Will that support give way? That is the key question.

If it does, I have also drawn in the Fibonacci levels and since we know that the 50% and the 62% levels are the most common levels for turns, my best guess for the C wave low is either the £65.50 or the £63 area.

And if this occurs, I would hope to see a momentum divergence betrween the A and C wave lows. That would set up the likelihood of the rally picking up again.

But with the market now testing solid support at £69, I would not be amazed if the shares had a little upside surprise in store.

Here is the updated chart:

 

In fact the market did have that little upside surprise and bounced off the T3 support line and in a slightly larger three-up, set my B wave high at the £76 level before falling in wave C with the gold price. And where did it fall to? Right to the Fibonacci 50% support at the pre-ordained £68 level. Bingo! One target hit on the button.

Of course, that is where any trader following my analysis would have set resting limit buy orders.

But we are not quite out of the woods yet because there is no momentum divergence at last week's low. Remember, such a divergence would indicate selling pressure was drying up and harden the odds for a resumption of the rally. So far, I cannot claim it is. Thus, my lower target at around £63 remains in play.

If my Elliott wave labels are valid, the end result remains the same - the bull run will resume when my C-wave makes a low. The upside should be interesting!

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