21 September 2012

Update on the Gold 'Shadow Chart' - Review of the 'Cup and Handle' Formation

A "Cup and Handle" is a bullish continuation pattern in an uptrend
The greatest factor working against this current gold chart as a cup and handle is that it appears during a consolidation pattern in a broader uptrend. 

The 'cup' is best shaped as a "U" and the broader the bottom the better.

The 'handle' is a retracement when the right side of the 'cup' reaches its prior highs. The handle often resembles a bullish pennant.

The retracement usually does not exceed 1/3 of the advance of the cup to its second high, but can go as deep as 1/2 in a volatile market.

Here is a textbook picture of a 'cup and handle formation' from Investopedia.

Below that is the chart in progress of a cup and handle in gold that proved to be quite successful.

Here is the current daily chart of Gold. As you can see there is a possible cup formation. It will not be confirmed until we see a successful 'handle.'

I cannot stress this enough.  It will be in the nature of any 'handle' that is formed that the cup and handle formation can be confirmed.

Until then there remains the very real possibility that this will develop into a mere trading range between 1800 and 1550.  Gold may also hit the 1800 level and after some consolidation break away and just keep going higher.
The more I look at the possibilities the more I become convinced that this is just a long consolidation in a bull market.  That implies a breakout and breakaway to the next target price.   We cannot tell if it will break out on this attempt at the top of the range.  This is the third major attempt.  It does have the winds of QE3 at its back.  But there is significant trouble in the global economy that may pose a risk to all asset prices.  

And of course the western central banks have a vested interest in keeping the price of gold 'orderly' so it does not impair the confidence in their paper games of QE to ∞.

 One way to make yourself look good is to diminish the competition.  They have to be careful of being too heavy handed because at some point intervention becomes 'machine-gunning the lifeboats.'  Therefore it is likely that they will have someone else holding the gun, some favored bank or hedge funds.

I do not know what will happen.  No one does.  But we know what to look for.