Gold’s Symmetry and Important Basing Patterns
Significant Head & Shoulder (H&S) consolidation patterns are fairly rare but they do happen from time to time. H&S patterns are one of the more reliable TA formations. These formations are reflection of investor psychology where we witness how behavior patterns often repeat themselves. H&S patterns can be a bearish topping pattern or bullish inverted consolidation pattern.
Recently gold has produced two very pretty and symmetrical inverted H&S patterns, one very large and the other a smaller pattern. In this editorial we would like to discuss the symmetry of the big H&S pattern and how it led to the formation of the smaller H&S consolidation pattern. Symmetry, for us, is an important part of Technical Analysis. Key symmetrical patterns/levels often help establish subsequent support/resistance levels. The price action will tend to have a well balanced behavior that almost dances between these key levels. We will take a closer look at our two H&S consolidation patterns and find the symmetry that seems to be working beneath the behavioral waves.
The first chart (Figure 1) is an old chart with all the symmetry rails that helped make up the left and right side of the massive twenty month consolidation pattern on gold. Each colored arrow shows the specific symmetry points on the left and right side of the inverted head. Focus on the two black arrows that create gold’s large, dashed neckline (NL). Moving this NL down to the purple arrows shows the same angle for the left and right shoulders.
Notice how perfectly symmetrical the price moves within this balanced pattern – it’s very divine from a technical perspective. Each colored arrow demonstrates the different corresponding points on either side of the H&S consolidation pattern. The pattern had such a beautiful look to it that I had to dissect it and find out what it was that I found so appealing, so easy on the eyes. The chart below shows the twenty month H&S consolidation that will play a role later in the development of the smaller H&S pattern that just completed its price objective last week.
Figure 1: $GOLD – Daily Symmetry Chart
The next chart (Figure 2) shows both large and small H&S patterns and how the angle of the large, dashed neckline proved to be key in pinpointing the left and right shoulders on the smaller H&S formation. First, note that the larger H&S consolidation pattern didn’t start from the interim top in March 2008. Many technicians have incorrectly used this interim peak as the neckline - completely missing the real symmetry that is in play. The large neckline actually began with the next interim high in the summer 2008 when oil hit its peak.
This is a H&S pattern and it requires a left shoulder to start the pattern. If you start the NL from the interim top in March 2008 there is no left shoulder. The pattern is fairly obvious. Nonetheless, I have seen so many different interpretations of the critical NL placement that it draws into question certain experts’ technical abilities. Irrespective, what is important is that the NL is in the correct location. Later we can discover confirmation of this critical neckline. How the price interacts with it will give us so much more information on which we can rely upon.
To confirm the twenty month neckline, look at the indicated blue breakout (BO) in Figure 2. You will notice just below the neckline how we first hit it and then retreated for several weeks telling us our NL was HOT!!! The next important step was to break above it to confirm that we were truly in a serious breakout mode. Gold broke above the big NL and then one last backtest of this level to say, OK…all the difficult work is now finished, so let the rally continue.
It’s important to highlight the May 2008 interim top and its symmetrical rail above the NL. This will later come into play during the large NL breakout/backtest and secondly in building out our smaller H&S consolidation pattern to the far right. When I see such beautiful technical pattern such as this, I question the gold manipulation/conspiracy talk that is floated around. So far, the overall pattern has struck the perfect tone and balance from our perspective – and no manipulation was even required to do so. ;-)
Figure 2: $GOLD – Weekly Semi Fractal Consolidation Patterns
Continuing with the weekly chart, we see how the formation of our recent, smaller H&S pattern was the direct result of the twenty month pattern. Notice how once we broke above the last symmetry neckline rail the rally took off in earnest and pushed the weekly RSI indicator to deeply oversold territory. It took a great deal of effort to push the price through those important rails and afterwards the move was digested during the smaller H&S consolidation. Notice where the initial decline found support - right at the top NL symmetry rail. This bounce was the beginning of an ABC correction and also formed our smaller, left shoulder. The C decline took gold down to where one would expect the strongest support: that being the large twenty month neckline around 102. After a four week rally off of the big NL we found support, twice on the top symmetrical neckline rail and thus completing the smaller H&S pattern. I called this chart a semi fractal chart because all the shoulders fell on the exact same angle as the big neckline. The smaller H&S neckline is a different angle. It too is a lovely, little pattern which next we will examine in detail.
Figure 3: GLD – Daily HLC Consolidation Pattern (edited chart posted 5/19)
Figure 3 is a close up of the recent, small H&S pattern for gold. You will notice the large twenty month NL and corresponding top symmetry rail which created the lows of the shoulders and head. Notice on the way up how each little red expanding wedge played a key role at the large, twenty month NL and its corresponding top symmetry rail. TA doesn’t get much prettier than what you will find on the gold chart over the past few years.
The small H&S pattern reached its price objective last week, so now we should be in some kind of sideways consolidation for awhile before we continue higher to reach the larger twenty month H&S price objective. In the immediate future, it’s quite natural to expect to even see a small pullback to the indicated support rails near GLD 114.50. This would correspond to approximately 1160 on June Gold futures. This would help work off the overbought condition and shake out some of the weak hands. We have equity options expiration at the end of the week and options on gold futures expire next Tuesday. We will be adding on any such dip if it were to come about.
Once last chart we would like to show is the gold monthly chart to put everything in perspective. Look to the top right side of Figure 4 to see the big H&S and the smaller H&S pearched above it. Folks it doesn’t get much prettier then this.
Figure 4: $GOLD – Monthly HLC 3 Cups & Handles
All the best….
Rambus and Xiphos
