Golden Touch Punishes Weak Hands
Posted by tktrader on August 19, 2009
Market watches and traders all had their eyes on the topping pattern formation developing in the S&P500 index. No doubt many of their trigger fingers were quivering around the sell button come early July when the final right shoulder of the H&S pattern finally developed and completed the so-called reversal, then to be believed in the quiet before the storm stages of a significant broad market breakdown. Come July 13th though the market quickly reversed the reversal and shot up vertical slamming those laying on the shorts and lightening their positions.
Gold finds itself in a similar situation, though slightly more confusing technically. The past run in gold has been very strong and it now finds itself consolidating in an inverse H&S pattern. Though H&S is typically a strong indicator of sentiment reversal, they can also form as a result of consolidations and hence continuation patterns.
Take a look at gold today. This IS the calm before the storm. Inverse H&S after uptrend indicates likely consolidation ending in symmetrical triangle consolidation. Technically the H&S can consolidate forever sideways but with the symmetrical triangle boxing price action in there has to be a break soon. The triangle closes around mid-October 2009.
This is a market that can’t find direction, neither side is willing to commit the big dollars to move it yet but that time will come. Watch the US dollar, watch inflation indicators and watch the broader market. On signs of growth or strength in the economy money should flow out of treasuries and the USD and give gold an extra boost. Gold is and will be a hedge against a weakening US currency. Gold is also now getting into typical season strength which should help at a minimum to put a bottom under weakness.
Previously the tight inverse correlation between gold the USD weakened as a result of both assets garnering attention as safe-haven areas for stored wealth. Should the market enter another period of panic, we can reasonably expect that relationship to reassert again.
Don’t trade what you don’t know. Wait for a direction to emerge.
