GOLD, after a long run up from early last decade, reached a peak of $US1876.90 an ounce early in September last year.
Since then it has been steadily falling in a descending triangle pattern that Mark Umansky, a certified financial technician and counsellor with the Australian Technical Analysts Association, says shows the long-term uptrend for the time being has paused.
Descending triangles are formed when a series of lower highs emerge while the lows hold a steady level, in this case about $US1570 an ounce. This phenomenon can occur in both up and downtrends and where it appears in a longer term uptrend, as with the current situation, this can indicate a powerful reversal pattern may emerge, Umansky says.
If the current descending triangle is the precursor of a dramatic change to a downtrend for the gold price then the price will break downwards from the bottom of the triangle. In that case, the pattern of lower highs experienced in recent months will have been an indicator that the bears are more resolute in the market than the bulls.
Umansky observes that falls through the base line of such a triangle pattern that represent reliable breakouts usually occur between half and three-quarters of the way to the apex where the two red lines meet on the right hand side of the page from the base at line A, the highest price point in the formation.
Patterns such as this can also generate upward breakouts. If the market breaks out on the downside this analysis would suggest a target of about $US1240, which is the distance of line A projected downwards from the breakout point of the triangle.
Line A represents a price movement of $US310.
Alternately, in an upward breakout, we would expect to see the price go in point C direction on the chart to a target of $US1916, again the distance of line A projected upwards from the breakout point above the upper side of the triangle.
A trading strategy for a down-side breakout from the pattern is to immediately close any open positions and open a new position shorting the market with a stop-loss in position just above the opposite upper boundary of the triangle. The process would be reversed if there is an upside breakout, with a stop-loss placed just below the opposite side of the triangle.
The loss associated with buying a futures contract that triggers the stop-loss would be $US40.11 for each contract. That means the risk-return ratio on an investment aiming at harvesting a $US310 return in either direction is about seven to one, an excellent prospect for investors, Umansky says.
However, investors are advised to be diligent and watch for a false breakout followed by a move in the opposite direction. In such a case reverse your positions immediately when a breakout occurs in the opposite direction, Umansky says.
This column is not financial advice. email@example.com