Gold may no longer be Head-and-Shoulders above the rest
James Chen, CMT April 14, 2016 11:00 AM
<p>The dramatic rise of gold in the first quarter of this year has coincided with a general decline of the US dollar as well as pronounced turmoil in financial markets, particularly towards the earlier part of the year. With the dollar-denominated precious metal benefiting from both a weakening of the greenback as well safe haven flows when volatility recently shook the equity markets, gold reached more than a one-year high above $1280 just a month ago in mid-March.</p>
The dramatic rise of gold in the first quarter of this year has coincided with a general decline of the US dollar as well as pronounced turmoil in financial markets, particularly towards the earlier part of the year. With the dollar-denominated precious metal benefiting from both a weakening of the greenback as well safe haven flows when volatility recently shook the equity markets, gold reached more than a one-year high above $1280 just a month ago in mid-March.
Within the past two months, however, equities have rebounded strongly and the dollar, though still pressured by a cautious and seemingly dovish Federal Reserve, continues to vacillate on every unexpected word uttered by Fed members. This environment has helped to slow gold’s rise to the point where its momentum has been almost entirely stalled and it has formed what appears to be a potential topping pattern.
This technical pattern is a rather clear head-and-shoulders formation with its head at the noted one-year high above $1280, and its right shoulder having just formed earlier this week at around the same price level (approximately $1263) as its left shoulder that was formed in February. Generally considered a potential reversal pattern, a head-and-shoulders chart formation represents a market’s multiple failed attempts to rise followed by possible capitulation. The setup is typically confirmed on a breakdown below the "neckline" of the pattern, which in the case of gold is currently around the $1217 level, not far below the current price.
Any near-term resumption of stock market volatility and/or further pronounced weakening of the US dollar in the event that the Fed becomes even more staunchly dovish could invalidate this potential reversal pattern for gold. In the absence of these gold-supporting events, however, a breakdown below the head-and-shoulders neckline could prompt a significant fall for the precious metal, with initial downside targets at the key $1190 and then $1170 support levels. The pattern’s actual measured target would be around the $1140 level, another major support level for gold.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.