Is gold reaching a top here?

One trading aphorism that has stuck with me over the years is this:  The higher the market climbs, the closer to the summit it is (and vice versa).  Of course, the corollary to that is that when the summit has been reached, the downhill slide begins.  My job as a trader is to try to find the summit where profits on longs can be taken and a new short position established if I believe the slide will provide a good profit.

With gold and silver in strong bull markets, this is an opportune time to be heeding my aphorism, I believe.

Of course, most people become more bullish as prices rise (if they are long).  That is normal (but destructive) human behaviour. They see their positions grow in profit almost daily and admire their own perspicacity in getting in to a great trade when they did.  They may even brag about their wins in the pub!

But overshadowing their pleasure is the entirely natural irritation that they didn’t load up with more.

If you had bought gold at $1072 in January (as VIP Club members did) at only £1 per pip, you might feel like kicking yourself for not putting on a £10 a pip bet instead, or more. But if your account was too small to handle the initial risk of a larger bet, a minor dip of a few dollars would have wiped you out.

So there you are with a small gold position in a rapidly rising market.  What do most people do?  Yes, after much agonising, they decide to buy a lot more (say £5 per pip or more) usually on a good up day as they can stand the pressure to buy no more.  The fear of missing out becomes intense.

And guess what?  That is usually just as the market takes a sudden lurch down.  Now you are left standing with a very top-heavy position where you are in jeopardy of being wiped out on a small dip – and you are forced to sell out.  All of this takes place within a normal bull run.

You had guessed the market correctly, yet did not profit. You may have taken a loss. Do this enough times and your trading career will be cut short.  This is emotional trading at its most destructive.

And multiply this process many times, and that is how spiky down moves occur from forced selling.  Of course, the pros are ready to scoop up the gold these traders are selling.

There is a lot more to trading than guessing which way the market will move.  That is why having a definite trading strategy is one key to success.

In the above example, instead of loading up near a high, a better practice would be to only add to positions with smaller size not larger, and on a dip not a surge up.  You will be acting against your ‘natural’ inclinations, but that is a much more disciplined approach.

With most people doing the wrong thing at the wrong time and getting more bullish as prices rise, have we now reached a point where the bull camp is full to overflowing?  Let’s have a look at the daily chart

There is a clear five up to the May high that obeys all of the EW rules and guidelines.  I have shown this labeling before.  Note the momentum divergence between the waves 3 and 5, as is entirely typical.  As wave 5 ended, the market began a decline to the $1200 level in early June and is wave A of an A-B-C.  Note that wave A turned right at the area of the wave 4 low – a typical target for a corrective A wave.  That is where I advised VIP Club members to go long again.

The market is now in wave B up and when this wave terminates, the market should embark on a large scale wave C down.  And wave B has a clear A-B-C look – another typical B wave pattern.

This forecast is a hugely contrary one.  Speculators are all in to the buy side.  Here is the latest COT data as of June 28 (4 days after Brexit):

Note the large swing to the bullish camp by both large and small specs.  This was their  bullish response to the Brexit vote that suggested interest rates were headed even lower. So now the hedge funds (trend-followers) are now a record net long futures at 6.3:1, while the commercials (smart money) is on the other side with a 2.6:1 short:long ratio.

Last December, the position was reversed with a record level of spec short positions – and where the Buy Low, Sell High principle really came into its own.  In the space of six months, the market has reversed the extreme COT positions and it took a $300 rally to do it.  Historically, that is a lot of lifting for such a relatively small gain.  That should be a warning light to the bulls.

In addition, I am seeing the old target for gold in the $5000 level dragged out of the woodwork and into mainstream articles.  Did you see that target featured in December when the market was falling – and would have been useful information?  Of course you didn’t – the more the market rises, the more bullish most become.

We have been  long since February and now you can now see why I am cautious presently and have advised taking profits on some of our long trades.  This is a professional approach called scale-up selling.  We are selling into the latecomers who have suddenly realised that with Brexit, they have a green light to buy gold.

I heard that the day after Brexit, the number of google enquiries of “how to buy gold” rocketed.  When shoeshine boys start buying, the pros start unloading.

Of course, gold may continue heading north – that is entirely possible.  But taking partial profits at strategic price points and banking them is a far better policy than loading up when the odds are saying a top is very probably near.

A famous trader said when asked how he made his fortune: “I always left some profit on the table for someone else”.

The Brexit Free Trial to my VIP Traders Club

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