These problems are important because the analysis of a double-bottom pattern and its outcomes is different from the analysis and outcomes of a support level rebound pattern.
The double-bottom pattern is a trend change signal. The height of the pattern from $1,180 to $1,433 is measured; this is $253. This value is added to the peak of the double bottom pattern, which gives a breakout trend target near $1,686. Clearly, achieving this target level would require a significant change to the downtrend.
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Investors who use this double-bottom analysis will buy the current rally, ignoring any price retracement activity because they believe the gold breakout is part of a new long-term uptrend.
The support level rebound pattern is a temporary rally within the downtrend environment. It shows a weakening of the downtrend, but does not signal a trend change. It signals a shorter term long-side trade where traders take profits as the resistance level is reached.
On the gold chart, the resistance level is near the upper edge of the long-term group of moving averages in the Guppy Multiple Moving Average indicator. The value of the upper edge of these averages is near $1,400. This is also near the main peak of the August 2013 rally in gold. The $1,400 level is also a resistance level in December 2010. The $1,400 level is a strong resistance feature on the gold chart.
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Investors who use this support-rebound analysis will sell gold as it moves close to the $1,400 resistance level. They will anticipate a continuation of the downtrend and watch for another test of support near $1,180.
Identifying the correct chart pattern helps to determine the correct investment and trading tactics. Our analysis suggests this is a support-rebound pattern.
— Disclosure: The writer holds an open position in the S&P Asia 50 Exchange Traded Fund.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.