Two Competing Signals in Gold

08/05/2009 10:02 am EST

Focus: COMMODITIES

Corey Rosenbloom

Founder and President, Afraid to Trade

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:


Click to Enlarge

As I mentioned last week on MoneyShow.com, gold is forming a symmetrical triangle consolidation pattern, with trend lines that now end at the $975 and $900 levels for support and resistance.

The lower trend line at $900 also corresponds 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 measure 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 to 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:

Gold's Inverse Head-and-Shoulders:


Click to Enlarge

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 lows of October 2008.

The neckline is—no surprise here—the $1,000 key resistance level, which if 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.

By Corey Rosenbloom of AfraidToTrade.com

 

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