How to Use Arc Patterns in Trading

06/06/2011 10:10 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

Arc trend lines, as seen currently on the charts for gold futures, can give way to large impulse moves if the key levels are broken. Here's what to watch for in gold in the week ahead.

Intraday gold prices are forming a classic “arc trend line” pattern that should be interesting to follow in the week ahead, depending of course on whether this structure continues gently or if price breaks firmly through one of the arc trend lines in place.

Let’s take a look at the pattern and note the levels we should be watching:

chart
Click to Enlarge

First, let’s take a brief look back at the beginning of May 2011 to see two more arc trend line patterns that formed and respectively broke, resulting in an impulse move when price broke free of its arc trend line boundaries.

Arc trend lines are no different than typical trend lines, except that traders aren’t as accustomed to thinking in terms of arc trend lines. Straight-line trend lines tend to grab our eyes easier.

Anyway, we had a quick arc trend line that ended May 5 with a breakthrough of the upper arc boundary and resulted in a rally from $1,470 to $1,530 in the context of another arc trend line pattern.

Price broke down sharply under the falling trend line on May 11, resulting in an “ABC” move from $1,530 to $1,480.

As you’ll see from the chart below, price later broke through the boundaries of a common descending triangle pattern, which puts us into the present, wider, arc trend line structure.

The current upper resistance trend line rests where price is now in the $1,545-$1,550 region; the lower support trend line connects the swing lows and ends presently at $1,525.

These are the intraday/short-term structural levels to watch for any sort of breakthrough, which could result in another impulsive breakout move. Otherwise, look for price to play ping pong between these boundaries.

If the chart above is too small, let’s step out to the 120-minute chart and also draw in a nice triangle pattern:

chart
Click to Enlarge

Now we can see the little descending triangle pattern that formed for most of May. Price broke through impulsively near may 20 on the breakthrough above $1,500 (round number).

This breakthrough is a good example of the pattern/concept, as it was the trigger that opened the door for an upside rally that developed into the present arc trend line formation.

Keep these levels in mind and use these as neat little examples of both the arc trend line concept and a triangle breakout play.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com.

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