Monday, 10 April 2017

Gold Developing Inverse Head and Shoulders, Again?

Gold is at it again, repeating last year's song and dance (it's break dance as it involves inverse head and shoulders).

b-boy, break dance, head spin
Head spin: an Inverse head and shoulders move
Let have a look what i mean.

Maybe it's seasonality, there's some interesting parallels in the gold price developments in the chart in the 2 consecutive years (2016 - 2017).

First, in both instances, gold prices bottomed in late December, and then rallied strongly into January - February. Or some may say, in both cases, it occurred after Fed's rate hikes. This should at least give investors some pause that rate hike is always bad for gold prices. Fed rate hike indicates inflation, and inflation is good for gold because it's often used as an inflation hedge.

Spot gold chart showing 2 inverse head and shoulders formations back to back
Spot gold chart showing 2 inverse head and shoulders formations back to back.
(Click chart to enlarge)

The Inverse H&S development in 2016 failed in early May (as indicated in the chart) as it couldn't break out of the neckline. It had a few attempts at challenging the neckline. And in July, it broke through the neckline, but only quickly rejected by the strong long-term downtrend resistance line. It had a few more attempts at the long-term downtrend resistance line, and eventually failed, and plunged to $1120 where gold finds its bottom. (I have written 2 articles regarding the critcal importance of this long-term downtrend resistance line). The price of gold has never been on the right hand side of this long-term downtrend resistance line, ever. I'd like to call it the Great Wall of Gold.

But gold isn't about to give up its fight yet, and once again, in 2017, gold comes back with its same old break dancing of Inverse H&S. This time, it fares better because it has actually crossed above the neckline at the right shoulder, unlike previous year when it had never done so (the false breakout of the neckline occurred quite sometimes after the right shoulder).

Having learnt that lesson of 2016, one needs to be careful that one isn't jumping the gun this time and say we now have a successful development of an Inverse H&S. For a confirmation of the Inverse H&S pattern to play out, at the very least, the price needs to move above the Feb high of $1260-1265. The gold price is going sideways lately because moving above this $1260-1265 is challenging because this level isn't just the Feb's high (or YTD high), the 50d MA also comes into play. To avoid a repeat of 2016 of a head fake / bull trap, the price needs to break out of the long-term downtrend resistance line. Alternatively, it rises to test the downtrend line, comes back down to test the neck line or $1260-1265 level, and then make a final break out of the downtrend line. We can then declare gold is now truly, without question, in the full-fledged bull market. At the very least, this break out will draw more players that have been sitting on the sideline waiting for this event into the gold market. The bullish momentum itself will then carry it higher.

While the long-term downtrend resistance line is quite a pain in the butt for gold bulls, the upside (no pun intended) of this downtrend is that as time goes on, the price to break out of this downtrend is ever so lower. In early July 2016, when gold tested this downtrend resistance for the 1st time since 2012, the price was $1375. Gold only needs to rise above $1285 (preferably $1300) in the next few weeks (or $1290 in the next few days) to break out this final technical resistance of the gold bear market. So the bar (no pun intended) for gold bulls has lowered by $90.

Overall, gold looks more promising than last year (the bottom in 2017, so far, is higher than the bottom in 2016 - aka higher low - indicating medium term bullishness). The next few weeks is very critical, and will determine if we're repeating 2016, or something more bullish. It's important that it won't fall back into the neckline to avoid the repeat of 2016 price action.

(Inverse) Footnote: The break dancer for this year seems to be a lot slimmer than the one from last year.

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