Two Competing Weekly Patterns in Gold

Aug 2, 2009: 10:30 PM CST

There’s an interesting debate on what exactly is the dominant technical pattern in gold on the weekly chart.  Let’s take a look at the two possibilities and note possible price targets for both patterns.

Gold’s Symmetrical Triangle:

As I mentioned last week (in a more detailed post), Gold is forming a symmetrical triangle consolidation pattern, with trendlines that now end at the $975 and $900 level for support and resistance.

The lower trendline at $900 corresponds also with the rising 50 week EMA, so this would most likely be a support zone should gold fall to test this level anytime soon.

In terms of the price targets – we cannot assume we know the direction of the breakout from a consolidation pattern, so we’ll need to look at upside and downside targets.

To get the measurement (projection), you typically take the ‘height’ of the triangle, or the distance from where the top to the bottom of the first swing in the pattern occurs.  In this example, we’ll take the February 1,000 high and then measured down to the $850 (estimate) level.  This gives us a rough estimate of $150 for a target.

We would then add $150 to the breakout zone (let’s assume) at $975 to give us an upside target of $1,125.

To get a downside breakout target, we would subtract $150 from the $900 level to give us a target of $750 (which also corresponds with the rising 200 week SMA and prior support from late 2008).

My suggestion is to wait for a break, and not try to be a hero and call the breakout direction, because price has been known to surprise the majority.

Let’s turn now to the alternate pattern – that of a large-scale Inverse Head and Shoulders (a pattern discussed frequently by Adam Hewison of Market Club).

Gold’s Inverse Head & Shoulders:

We note two roughly symmetrical swings in mid-2008 and mid-2009 to reflect the “mirror image” of the two shoulders, which is then separated by a head off the October lows of 2008.

The neckline is – no surprise – the $1,000 key resistance level, which broken, would likely trigger a flurry of buying to the upside.  This pattern allows us to quantify a target by taking the distance from the neckline to the head, which is roughly $300, and then adding it to the upside breakout at $1,000 to give us an upside target of $1,300.

I do a special ‘bonus’ additional report in this week’s Intermarket Technical Report which also lists Fibonacci price retracement targets to watch and overlay with the above grids.  I also show an Elliott Count on gold and give a more detailed explanation of what to look for and how to trade potential moves.

The Intermarket Reports take a look at the monthly, weekly, and daily charts of the 10-Year T-Note, S&P 500, Gold, and Crude Oil markes as well as the US Dollar Index.  I note current technical structure, highlight how the timeframes interact to give a wholistic picture, and define how the intermarket forces work (and how movement in one market is expected to be reflected in another market).

Please check out the “more information” page for additional information and to subscribe to these informative 20+ page weekly reports.

Corey Rosenbloom, CMT

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Comments
  • Rya

    Hi Corey,

    I thought the inverse head and shoulder break is usually used for a reversal of a downtrend, not a continuation of an uptrend?

    Thanks.

  • Dan

    I think gold will be hammered in the not so distant future. When the S&P corrects itself investors will gravitate to the US $ and the hammering will commence.

  • WallStreetSwami

    Whats your thoughts on it also being a Cup and Handle formation ???

  • EricDavis

    Crack the books back open, one of those patterns is a Unicorn..... and may be a great sign of confirmation bias.

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