Bearish Chart Pattern Hints at Reversal for Spot Gold

By Russell Glaser – The appearance of a head and shoulders reversal pattern provides technical evidence to sell. Other long tern technical indicators support this hypothesis.

The daily chart for spot gold trading displays the formation of a bearish head and shoulders pattern. This reversal pattern may signal a top in the intermediate uptrend that spans from a low in July to a high in November.

Going to the chart, the head and shoulders are clearly defined with the left shoulder taking shape on 10/14, the head is located at 11/9, and the right shoulder at 11/23. A break below the rising neck line would signal a completion of the chart pattern. By measuring the height of the neckline we can estimate a potential move of $100 from the breach below the neck line.

Further evidence of a bearish move in the price of spot gold can be found when looking to the long term time frame. The November candlestick on the monthly chart appears set to end on a doji candlestick. This is a bearish signal for spot gold and supports the hypothesis of a price reversal.

The monthly chart also shows technical divergence in the Momentum oscillator. In December 2009 the Momentum indicator registered a high of 151 on a new high in the price. However, the next peak in June 2010 fell to 140 despite a new record high in the price. We may expect the November number to also fall which would provide further evidence of divergence thus supporting a drop on the price.

Given the bearish chart pattern and the accompanying negative signals from the monthly chart the uptrend appears to be weakening on a technical basis.

A sell would be recommended upon a break below the neckline from the head and shoulders pattern with a take profit level near the rising trend line on the daily chart. The trend line rises off the lows of February, March, and July.

Forex Market Analysis provided by ForexYard.

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