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Gold glittered on Tuesday as prices rose to their highest levels this year -- futures briefly hit $1,000 while spot prices rose to six-month highs. Will the precious metal continue to shine at this level?
First of all, one needs to understand the behavior of gold prices. Gold attracts more emotional and political attention than any other commodity. Its relationship with portable wealth, money and Government adds a unique character to its behavior.
The well-established resistance level at $1,000 is a psychological resistance barrier and is not related to the supply of gold or the demand for gold. The movement is created by political features that have an impact on currency movements and the U.S. dollar.
Believe the chart or believe your heart? The rapid breakout with AIG from $14 to $30 set up a flag pattern.
The flag pattern is created with a combination of three features. The first is a flagpole. This develops over 1 to 5 days and includes very large price moves. The combined days rocket above the surrounding price activity and are clearly visible on the chart.
The second feature is a bullish flag. This is created when the price retreats from the peak of the flagpole. The retreat can be defined by two parallel down sloping trend lines. The lines do not converge. Converging lines develop a pennant pattern and it is traded differently. The sides of the flag are parallel and slope downwards. This is a bullish flag pattern. The lower corner of the flag should be no lower than 50 percent of the height of the original flagpole.
The third feature is the price breakout above the upper edge of the flag. This breakout is usually very rapid and powerful.
This pattern is used to calculate price targets. The height of the flagpole is measured and this value is projected upwards from the point where price breaks above the upper edge of the flag. This gives an exact price target, which has a high level of reliability. It’s one of my favorite trading patterns.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.