“Gold”en pennant in play for bulls
Matt Weller, CFA, CMT February 23, 2016 8:05 PM
Last week, we took a look at the fundamental outlook for gold, noting that the direction of the metal is heavily dependent on changes in real interest rates and the US dollar. Today, we wanted to examine a near-term technical pattern that could help traders capitalize on an imminent breakout.
For any long-suffering Chicago Cubs fans who may have forgotten, a "pennant" is the triangular flag given to the winner of either the American or National League champion in Major League Baseball (MLB). However, the term "pennant" has a slightly different, but related, connotation in technical analysis.
When talking about price charts, a pennant refers to a pattern formed by a two converging lines or boundaries at the top or bottom of a trend. In the case of an bullish pennant, the pattern looks like a triangular flag (pennant) on top of a pole (the previous uptrend). Generally, a pennant is seen as a continuation pattern, meaning that a pennant that forms at the top of an upswing is more likely to break out to the topside and herald another leg higher.
As it turns out, that’s the exact pattern we see on gold’s 4hr chart. Since peaking near 1260 last week, gold has put in a series of higher lows and lower highs, forming a picture-perfect bullish pennant pattern centered around 1220. Now all bulls need to see is a breakout above the top of the pattern near 1225. Of course, it’s always worth keeping the longer-term perspective in mind; specifically, Gold is testing the top of a nearly 2-year bearish channel in the mid-1200s, so even if we do see a breakout from the near-term pennant pattern, bulls may want to tap the brakes as long as we’re below 1250.
Alternatively, a break below the pennant pattern (and especially the near-term bullish trend line near 1185) would suggest that the longer-term bearish channel is taking precedence and could herald a return back to the mid- or lower-1100s heading into March. Regardless of how the near-term technical situation plays out, traders will have a much better idea of what to expect moving forward by the end of the week.
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.