The lines in the sand have been drawn. The fireworks will soon be lit. The only unknown now is the direction the next significant move. The market will announce the direction with the next breakout.
The Gold charts can give traders a ton of fake out signals on a short-term basis. But on a longer-term basis it can be said that the Gold charts are among the most reliable of all markets. Gold is very dependable in advertising big moves in advance.
The Gold market is the perfect example of a concept of classical charting I call “morphing.” Morphing occurs when many short-term patterns (most of which fail) combine to form a massive pattern. These short-term patterns have a way of wearing out traders financially and emotionally. Eventually a chart pattern of huge proportion forms and matures. This larger pattern then leads to the next significant move in Gold. It has always been this way in Gold.
Perhaps someday I will have time to catalog all the major patterns that resulted in price thrusts in Gold. To summarize, I have counted 14 major weekly chart configurations since the 2003 blast off. Eighty percent of these patterns worked. The ones that did not work resulted in additional morphing. Of the ones that worked, from the point of pattern completion or breakout the market traded against a breakout position an average of only $6 per ounce intraday before turning into a big profit, with a worst-case intraday loss of $15 per ounce. This is how reliable major chart patterns are in Gold.
Gold is now set to generate the next major signal, and very soon. The direction is yet to be determined.
Here is what we have, and I will present it as a bull or bear scenario.
The dominant trendline in Gold dating back to the 2008 low is just below the market. The following weekly chart displays this trendline under the orthodox intraday lows as well as the weekly closing prices. A Friday close below $1613 would violate the closing price trendline. A move below $1600 would violate the orthodox trendline.
Trendline violations, in and of themselves, only mean that there is a change in market behavior. Trendline violations must be accompanied by other technical developments. In the case of Gold the other factor is the possibility of an 8-month descending triangle. Descending triangles are almost always resolved by a downward move. A trendline violation would likely lead to a test of the lower boundary of the descending triangle at around $1525. The lower boundary is where the next line in the sand comes into play. A decisive violation of the lower boundary would not be good news for Gold bulls.
A characteristic of all major patterns in Gold over the years is that they could be read both ways. The same is true with the present Gold market. The closing price is the most important single price of the day since all the day traders are neutralized. The daily closing price chart below shows that Gold could be forming a massive continuation inverted H&S pattern. Mature patterns tend to have symmetry — and this is the case with this H&S patterns. The right and left shoulder lows are within a week of being equal distance from the low of the head. It is possible to interpret the right shoulder itself as a possible smaller H&S bottom, although I dislike downslanted necklines. [Note: I realize that Elliott Wave traders do not believe continuation H&S bottoms exist. But, the founders of classical charting principles — Schabacker, Magee and Edwards — all acknowledged the pattern. So, you stick to Elliott Wave and I will stick to classical charting.]
There are several factors in support of this interpretation. First, most periods of congestion are resolved in the direction of the move preceding the congestion. In other words, the odds always favor a continuation pattern. Second, open interest is the lowest it has been since Sept. 2, 2009 when Gold was below $1000. This was precisely the point– to the exact day — when Gold last completed a chart pattern (17-month continuation H&S) of the magnitude of the current consolidation pattern. The Sept. 2, 2009 low has not been seen since.
A close above $1700 would tip the scales toward an upside breakout. The upside breakout would be confirmed by a close over $1800 and would have a target of $2080.
Is there a chance that the Gold chart could continue morphing? Of course, but for the first time in nine months the Gold chart is capable of launching a really big move. And based on the mature nature and symmetry of the present chart, the start of the next move should be very soon.
Markets: $GC_F $GLD