Fibonacci, Nostradamus and Gold

Hi everyone,

I hope you’ve had a good week. In last week’s blog I shared a couple of ideas from our new Checklist Report for August. Although I couldn’t disclose as much as I would have liked to, given the recent release to our paying Trading Club members, I did explain why two markets in particular (gold, and the US dollar) were high up on my watch list coming in to this week. Today I thought that I would provide a bit more colour on these trades with of course the help of our Checklists.

Let’s begin with gold – undoubtedly where the action has been in recent weeks. The market has more than doubled from the low of  $1046 set in December 2015, and year-to-date has gained almost 35%. Earlier in the year I explained why I felt that gold was headed for new highs, and how a positive score on our Checklist had confirmed the timing of this view. Here’s a daily chart capturing the various stages of this remarkable rally.

As much as the bulls will hope that it continues, this month’s updated Checklist provided a warning that the momentum may be about to weaken. I understand how crazy this may sound looking at the chart currently, but you must remember that shifts in the fundamentals ultimately drive price – not the other way round. In the same that a positive shift in our Checklist heralded the start and continuation of the rally, a weakening this month should also see a reciprocal move in price. Of course, there are also the sayings to “respect price” and that “the market can remain irrational for longer than you can remain solvent”, and by no means would I attempt to stand in the way of a steam train, but this seems an important early indicator to me that chasing the market higher is likely a bad idea.

As the market is making new highs, it is very much in ‘steam train’ mode now. But looking to the same technical levels that I initially included in my bull thesis almost 6 months ago, I do see an obvious level that as a trader, I would take down some risk in to. That level is the 123.6% Fibonacci extension from the 2011 high – 2015 low which projects $2125.

Now I appreciate that some of you will consider this to be total ‘hocus pocus’ (I believe that is the politer term!), but this is what I have found works for me. I am not a descendant of Leonardo of Pisa, nor do I obsess over sunflowers and sea shells, but I believe it is relevant here (whether self-fulfilling or not, it improves my edge!). With gold currently around $2060, a mere 3% upside continuation would see the technicals and fundamentals align – and that’s where we ideally want to be trading, in any market.

My hypothesis therefore (without wanting to now sound like Nostradamus) is for gold to squeeze a little higher, towards 2125, before seeing something of a retracement (NOT a bear market, but more of a natural pause in the rally). I tend not to make predictions and instead try and focus on the present, but should the market behave as I am anticipating and correct towards the 2011 high (former resistance becoming support), and if we have a coincident improvement in our Checklist at that point in time, then this would once again be a super bullish setup in my eyes.

That said, a contrarian argument can be made that investors are under-pricing the probability of a vaccine becoming available by as early as November, and if so, that would presumably see an unwind in a lot of the long positions in gold. Last week’s post was titled “two sides of the same coin”, and on the other side of the gold trade is the US dollar.  The greenback has been under tremendous pressure in recent months and is of course inversely correlated to gold. So should gold eventually weaken, would currency speculators stop trashing the US dollar?

That remains to be seen, but our Checklist does show a positive score this month. So far it has looked rather foolish, though the market did muster a short-lived technical correction earlier this week. Firstly, here’s how our Checklist arrived at that positive score, followed by another little example of Fibonacci in action…

Although it is hardly something that I’ll be bragging to my friends about I did highlight this to our members during the previous week’s Trading Club video, and the pop from 92.60 to 94 was a nice little trade for 1.5% in a matter of two days.

Time will tell how my thesis plays out, but if you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Have a great weekend,

James

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