How to Trade the Pennant Pattern in Gold

10/23/2009 12:01 am EST

Focus: COMMODITIES

James Chen

Chief Technical Strategist, FX Solutions


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(Price on 1st pane, Slow Stochastics on 2nd pane; horizontal support/resistance levels in yellow; uptrend lines in green; downtrend lines in red; Fibonacci levels and chart patterns in white; 50-period simple moving average in light blue.)

Price action on spot gold, a daily chart of which is shown, has formed the appearance of a pennant pattern consolidation after reaching new all-time highs last week. This potential continuation pattern occurs within the context of a strong continuing uptrend. The all-time highs that were reached last week, just above 1070, represented a 161.8% Fibonacci extension of the prior bullish run.

On the latest bullish run that represents the pole of the pennant pattern, the important 161.8% Fibonacci extension resides around the 1125 level. As gold would be in uncharted territory if it breaks out above the pennant and the 1070 high, in the absence of any further precedented resistance levels to the upside, the 161.8% Fibonacci level serves as a high-probability price target.

This is, of course, provided the pennant actually turns into a continuation pattern and last week's all-time high is broken. Immediate downside support within the context of the current consolidation resides around the level of the pennant's lower border, which is in the approximate vicinity of 1042-1043.

By James Chen, chief technical strategist, FX Solutions

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