A HOLIDAY GOLD SALE ? / SEEKING ALPHA ( HIGHLY RECOMMENDED READING )

A Holiday Gold Sale?

by: Hard Assets Investor

November 26, 2010

By Brad Zigler

There’s a holiday gift being fashioned for gold market traders. Or so it seems.


Now, it’s not a sure thing, but the passage of each trading day seems to make it more and more real. It looks like a head-and-shoulders top is forming.


An H&S pattern signals the reversal of an uptrend and consists of three successive peaks. The middle peak — the head — is the highest while the two outside peaks — the left and right shoulders — are lower and roughly equal in elevation. The reaction lows of each peak can be connected to form a support area known as a neckline.


If you look at the gold chart, you’ll see the uptrend began in July when spot bottomed at $1,155.


Gold is now forming what could turn out to be a right shoulder. The left shoulder was formed in mid-October when prices peaked at $1,388, then retreated to establish the neckline’s origin at $1,315. A rally ensued, crowning at $1,424 to create the pattern’s head. Volume spiked to near-record highs then and on the ensuing downslope. The sell-off to $1,329 ultimately provided a connection point for the right side of the neckline.


Extending the neckline up and to the right from that point shows us where the critical support level for front-month gold is. If prices trade south of the neckline, the H&S pattern will be confirmed and the uptrend — the July-November uptrend — will be reversed. Given the time required to form the left shoulder, a test of the neckline is likely in the first week of December where support ought to be in the $1,340 area.


December COMEX Gold

A decisive break of support could lead to a test of the $1,258 area — a 62-percent retracement of the July-November rally. Now, a sell-off wouldn’t necessarily mean gold’s longer-term bull market ends, but it would clean out the weaker hands that jumped aboard this autumn. A retreat below the $853 level would be needed to break gold’s decade-long trendline.


There are a lot of “ifs” in this scenario, so let’s not get ahead of ourselves. The first thing to watch for is weakness in gold’s price. If bullion remains buoyant, say above its 50-day moving average — today at $1,343 — there’ll be no confirmation of the H&S pattern and technicians will have to go back to their drawing tables to plot new courses.


However, a decisive downside break — that is, one on heavy volume in the next week or two — will give sellers and would-be buyers a shot at discounted gold, cheapened by as much as $80 or so.


That would be a bit of a holiday gift, no?