The rapid rise in gold prices has pushed the precious metal toward a target of $1,250/oz -- a level discussed on CNBC two weeks ago.
As gold moves towards this target, the momentum has begun to slow in the rapid breakout, indicating a higher probability of a trend reversal or the development of a consolidation pattern.
The weekly COMEX Gold chart includes an inverted head and shoulder pattern. The first shoulder was created in December 2009. The head of the pattern first developed in February 2010 while the right shoulder was developed in March 2010. The neckline uses the rally highs at $1,159 and $1,139.
When the price moved above the neckline value on April 6, 2010 April, the inverted head and shoulder pattern was confirmed.
The head and shoulder pattern has two important messages -- the first message is about the high probability of a trend reversal, which has developed.
The second message sets the first target level for the breakout, which has almost been achieved.
The pattern target is calculated by measuring the distance between the head and the neckline in the pattern. This gives a value of $98.00, which is projected upwards from the middle of the pattern.
The upside target is near $1,250 and is a maximum target level.
An alternative calculation projects the measurement value from the breakout value near $1,130. This gives a lower upside target of $1,225 - a value which has been exceeded.
When the price approaches the target level, the momentum usually declines. The best result is the development of a consolidation pattern which is a foundation for a new trend breakout.
The upper resistance levels for the consolidation pattern is $1,250. The lower level for the consolidation pattern is near $1,225. A breakout above this type of consolidation pattern gives a first target near $1,275.
The recent trend rise has been very fast. This has the features of a fast rally so there is a higher probability the price will fall below the $1,225 level before developing a rebound.
The potential support level for any price retreat is provided by the uptrend line. The current value of this line is near $1,190. A fall and rebound from this level shows a sustainable uptrend. This allows for a steady trend rise above $1,250 and higher.
The pattern of any retreat and rally may allow for the calculation of new upside targets.
A consolidation between $1,225 and $1,250 also allows the price activity to move sideways for another four weeks before price meets the uptrend line.
In this situation traders watch for the uptrend line to act as a support level. This develops into an uptrend continuation with initial upside targets near $1,275.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.comand producer of Gold – Mining the Markets. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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