Head and Shoulder Pattern in Gold Price

13 April 2013

Introduction

The price of gold plunged 5% Friday to its lowest level in three years. Some said it was due to countries like Cyprus dumping gold to pay for the debts;  other said that the economists were increasingly worried about the economy's forward momentum heading into Spring.  Whatever the reason,  lets examine Gold's technical to see where it would be heading.

The Head and Shoulder Pattern

One of the very common pattern in stock analysis is head and shoulders pattern.  It is a reversal pattern and it is most often seen  in uptrends.  It is quite reliable pattern when it is found in an uptrend.

Such a pattern will see buyers coming in to form the left shoulder and the neckline with fairly large volume.   As sellers sell at the highs and push down the price towards the neckline to form the left shoulder,  the buyers return to push up the price which may not necessary be the new high;  however,  the volume will suffer.   When the right hand shoulder is completed and touches the neckline,  sellers  will begin the dumping process with price falling sharply at large volume to complete the pattern. The price may test the neckline as it form the head and shoulder pattern.

After having broken the neckline,  the selling will not stop until a target is reached and this target is found by measuring the distance from the neckline to the top of the head or sometimes,  the shoulders.  When the target is reached,  the price will re-test the neckline.

Is this Pattern Found in Gold Price?

Gold price has developed exactly the same head and shoulder pattern after yesterday's fall except the head is much smaller in size compare to the left and right hand shoulder.

It is likely for Gold to head lower until the target price is reached

Update 1: 18 May 2013

Gold has failed to break the neckline in its attempt recently and now has broken the bear flag resistance of 130.3 except that the volume at the break was low.   The full STO is now at oversold region and the RSI is set for a rebounce.   However,  the ADX (not shown) is telling us  that there may be accelerated declines ahead.  The price development next week will determine the direction.

Update2: 26 June 2013

Gold has broken down again after forming a second neckline which does not usually happening.  The market might not be convinced that the correction was done and there was another opportunity for a second head and shoulder (H&S) to be formed.    This second H&S would appear to set Gold price back further down and have a target price which is less than $1,000/=

Update 3 :  18 August 2013

Gold price broke neckline 2 on around 13 August 2013 on lighter than expected volume.  The breaking down of neckline 2 could be QE tapering related.  As the volume is low during the break up of neckline 2 ,  there is a likelihood of Gold may revisiting neckline 2 in near future if the QE tapering news is reversed.