What caused the ‘Vomiting Camel’ pattern in gold

BK explains gold's 'vomiting camel' pattern
BK explains gold's 'vomiting camel' pattern   

For those of you who are satirically challenged, the following analysis may cause severe discomfort. To you, I say 1) I am sorry for your affliction and b) we can't be friends. Now onto the analysis of the dreaded Vomiting Camel Pattern (VCP).

During my traditional weekend chart work, I discovered a disturbing pattern developing in the gold market. After spending much of 2014 gyrating above $1,200 gold has now formed the vomiting camel pattern.

To analyze this pattern, we must first start with what may cause a camel to vomit. After literally minutes of research, I found the main cause of camel nausea is eating too many bugs. In this case, our camel has spent the better part of 2014 devouring gold bugs. The dramatic spike in the U.S. dollar has made it clear that the aforementioned Camelus Bactrianus has had its fill of investors betting on higher gold prices … including me.

Contents of Stomach analysis (CoS)

When dissecting the Vomiting Camel, it is essential to measure the contents of the stomach ( aka, CoS). An accurate CoS measurement can help us determine where and when this pattern will resolve itself. The ultimate completion of the VCP is known as the splat zone, which is often referred to as the "SZ."

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This VCP has vertical height of over $200, while the length of the stomach is 9 months. Combining these metrics we can estimate the initial Splat Zone to be near $900 and within the next nine months. But wait, there is more …

Rhombus breakdown

If we take a look at a longer term chart, it becomes very clear that this vomiting camel is perched precipitously on the edge of a Rhombus Formation. This is not good. We know from SWAG analysis (Google it) that the combination of a Vomiting Camel Pattern and Rhombus Formation can result in a non-linear event.

Camel
Martin Harvey | Peter Arnold | Getty Images

Traditional VCP and Rhombus analysis suggests the non-linear target for the Splat Zone should be between 61.8 percent and 100 percent of the rhombus' height. Based on this knowledge, I calculate the target Splat Zone to be between $880 and $700. What I find encouraging is that the upper end of the target Splat Zone coincides with the Content of Stomach analysis which suggested a target SZ of $900.

Of course, this pattern is quite new and further analysis may be needed. However, given the several minutes I took to draw the pattern, I feel quite comfortable making a large levered bet that my target Splat Zone is accurate … unless, of course, it's not.

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Brian Kelly is founder and managing member of Brian Kelly Capital LLC, a global macro investment firm catering to high net worth individuals, family offices and institutions. He is also the creator of the BKCM Indexes, benchmarks for multi-asset money managers. He's also the author of the upcoming book, "The Bitcoin Big Bang: How Alternative Currencies Are About to Change the World." Kelly, a CNBC contributor, often appears on "Fast Money." Follow him on Twitter @BKBrianKelly.