Factor Alert, January 16, 2019 — Gold

An extremely constructive narrative is possible based on the longer-term chart developments in Gold. However, remember that in charting we deal with possibilities, never probabilities and certainly not certainties. At any given time we must deal with what we have at hand. Sometimes markets continue to unfold in an expected manner. More often than not charts morph into a different interpretation. The only thing we have to go on is what is visible presently.

Factor updates have commented for more than a year on a possible inverted H&S pattern on the monthly and weekly charts. Shown are the monthly log scale graph and the weekly chart. A decisive close above 1400 would complete this pattern by a 2% margin and establish a target of 1898 with a “best-case” swing target at 2637. This seems like a “layup” for a long trade — and that may be the case.

Yet I must point out some caveats to the bullish interpretation. The best H&S patterns have symmetry in duration and height. The current right shoulder is extended — it should have been completed in Jun 2018 for the duration-symmetry standard to have been met. Extended right shoulders must always be reason for concern.

Volume is another concerning factor with the H&S bottom interpretation. Volume should be heaviest in the left shoulder and/or head and lightest in the right shoulder. Volume is decisively heaviest in the right shoulder. Might this be due to the growing volume in futures markets in general? This is my guess, yet the strict interpretation of classical charting principles would suggest that heavy supply has entered the market during the right shoulder period. More concerning is that the rally from the right shoulder low in Sep 2018 has experienced contracted volume.

Thus, the overall form of the H&S on the monthly and weekly charts suggests the formation of a bullish inverted H&S pattern. Yet, the extended nature of the right shoulder and volume profile since Jan 2017 suggests that this H&S pattern will fail and produce a sizable price decline. While the “bull side” is on my radar screen, as necessary I will consider all possibilities.

The daily chart is interesting. Note the period from Aug 16 through Dec 7, 2018. This series of three pivot lows and two pivot highs qualifies as a Schabacker Horn or Sloping bottom. Note that the advance on Dec 24 climbed out of an upward channel. This acceleration must be viewed as constructive until proven otherwise. The market is drifting sideways in a possible pennant. An upward completion of this pennant may offer a measured-risk buying opportunity. I am monitoring this market closely for a buying opportunity.

plb

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