The Current Contracting Triangle in Gold

Aug 21, 2009: 10:50 AM CST

I’ve been reading some interesting commentaries on gold prices and expectations recently, but let’s step back to the basics and take a look at the lengthy triangle consolidation formation and note key levels to watch on a potential break.

Gold annotated chart:

A quick glance shows us why moving averages are irrelevant in a tight coil or trading range (such as the triangle).  In a range, we’re looking to buy overbought and sell oversold levels, such as a tag of the Bollinger Band, overbought/sold oscillator, or – most appropriately – the upper or lower trendline tests as these become evident.

Notice even that the 3/10 momentum oscillator is converging between +10 and -10.

Notice also the candle wicks or formations that have formed at each test – we have examples of hammers/shooting stars, dojis, bullish/bearish engulfing, etc.  These help confirm that a price turn is likely and help trigger entry (particularly when price closes above or below a key candle).

Let’s take a closer look at just the price triangle formation.

Gold simple chart:

The implication with a triangle formation – particularly a ‘symmetrical triangle’ as this is – would be to wait (stay neutral) until we get a confirmed breakout up or down from the coil (triangle) and then try to play for a momentum or impulse (trend) move out of consolidation.

Do not try to be a hero and predict the resolution (breakout) of the triangle in advance.  The edge comes from playing a range expansion move for a large target with a stop on the opposite side of the trendline (meaning, if price broke upwards, then your stop would be $10 or so beneath the lower trendline).

Check out our education page on triangles for additional examples.

If we take a ‘triangle purism’ approach, then most traders like to take the height of the triangle and then add (or subtract) that from the breakout zone.

In this case, the height would be roughly $200 points ($1,000 minus $800) which would be added to $970 (giving us an upside target of $1,170) or subtracted from $930 (giving us a downside target of $730).

Remember, plenty of other factors are at work in pricing gold, but these potential targets and structures come from the triangle pattern so popular in technical analysis.

Let’s keep watching to see which way this triangle will break!

Corey Rosenbloom, CMT
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