Gold has been a popular topic of conversation over recent months as the precious metal pushes to an all-time High. I wrote an article that was published on my website in December 2018, available through this link, and it was also published in the January / February 2019 edition of Your Trading Edge. Back then, I was suggesting that traders should watch for any bullish breakout on Gold from a monthly-chart triangle pattern. The bullish breakout eventually evolved and Gold is trading about $700 higher since that article, however, there is a new bullish chart pattern brewing that I believe is now worthy of attention. In this article I start by reviewing the breakouts from some of the charts profiled in the earlier Your Trading Edge article before explaining what I am seeing with the new technical charting pattern on Gold.
Gold monthly
Figure 1 shows the monthly chart of Gold that was profiled in the January / February 2019 Your Trading Edge article. Back then, price action was coiling within a symmetrical triangle and on very low momentum. Momentum is revealed by way of the ADX Indicator in the bottom pane of the chart. The ADX momentum line (black) was trading below the 20 threshold reflecting an absence of any decent momentum.
Gold was trading at $1,243.90 at the time of the screen shot for this article and I had suggested watching the $1,600 level as a potential target; if the breakout was to the upside. This target level was chosen as it was a whole-number psychological level, was an area of previous reaction or, as I refer to, an area of previous Support / Resistance and it was near the 61.8% Fibonacci of the 2012-2016 swing Low move. Traders who are interested in reading more about Support / Resistance and the value of monitoring Fibonacci levels can find relevant articles posted on my Tradecharting.com website.
Figure 1: Gold monthly chart from the Jan/Feb 2019 YTE article.
The chart in Figure 2 shows that Gold made a bullish triangle breakout in early June 2019 and this breakout evolved with an uptick in ADX momentum above 20. Note, also, the separation between the bullish momentum level (green) and the bearish momentum level (red). This is another encouraging and supportive observation that the ADX affords traders. You can read more about how I use the ADX Indicator through this link.
Figure 2: Gold monthly chart showing bullish triangle breakout by June 7th 2019.
The full expanse of this monthly breakout on Gold is shown in Figure 3. Gold was trading at $1,937.50 when this latest screen shot was captured, near the end of July 2020. This bullish triangle breakout extended well beyond the $1,600 target and has given about $700 for an approximate 55% gain; based on the increase value from the chart price featured in the 2019 Your Trading Edge article.
Figure 3: Gold monthly chart as at end of July 2020.
Gold Miners ETF: GDX
Figure 4 shows the weekly chart of the Gold miners ETF, GDX, as it appeared in the January /February 2019 Your Trading Edge article and note how price action was trading in a symmetrical triangle here as well. GDX was at $19.60 when this screen shot was captured for the 2019 article. Note how the ADX was already above 20 here; this is not as good a chart set up as the one that was on the chart of Gold. It is always better to have the ADX near or below 20 when watching for a potential triangle breakout; especially when price action is as coiled near the apex of the triangle as was the case here with GDX.
Figure 4: GDX weekly chart from the Jan/Feb 2019 YTE article.
The chart in Figure 5 shows the current weekly chart of GDX; captured near the end of July 2020. Price action is about $23 higher and more than double that from my earlier 2019 article and this represents a gain of around 124%. This triangle breakout was not a clean move higher though; price actually pulled back below that of the breakout level and this would have shaken out many traders. The ADX was a clue here again though as it rose with the initial breakout BUT dipped back below 20 at least 2 months before the sharpest part of the post-breakout pullback of late February 2020.
It is interesting to note that GDX has almost reached the target 61.8% Fibonacci level of this breakout move.
Figure 5: GDX weekly chart as at end of July 2020.
Junior Gold Miners ETF: GDXJ
The weekly chart of the Junior Gold Miners ETF, GDXJ, as it appeared in January /February 2019 Your Trading Edge article is shown in Figure 6 and offered a similar set up to the 2019 chart of GDX. GDXJ was trading at $27.16 at the time of this screen capture. The ADX was offering a better set up here as it was below the 20 threshold level, albeit on the rise.
Figure 6: GDXJ weekly chart from the Jan/Feb 2019 YTE article.
The breakout on GDXJ is shown on the chart in Figure 7 but this has been much less visually impressive. However, the ETF is trading at $62.58 which represents a 130% gain since the previous screen capture. Like with GDX, this breakout was followed by a deep pullback before eventually continuing higher. Also, like with GDX, the ADX indicator offered a potential warning about this weakness as it pulled back below 20 at least three months before the sharp pullback of late February 2020.
It is interesting to note that GDXJ has a long way to go until it might reach the 61.8% Fibonacci level target of this breakout move.
Figure 7: GDXJ weekly chart as at end of July 2020.
Gold ETF: GLD
The weekly chart of the Gold ETF, GLD, as it appeared in January /February 2019 Your Trading Edge article, is shown in Figure 8. This chart also revealed price action consolidating within a symmetrical triangle and on declining ADX momentum. The ADX was above 20 although there was still time for more coiling action before reaching the apex of this triangle pattern. GLD was trading at $117.12 when this screen shot was captured.
Figure 8: GLD weekly chart from the Jan/Feb 2019 YTE article.
This triangle breakout on GLD eventually triggered on June 7th 2019, similar to the base metal itself, but the ADX did not rise above 20 until the following week, June 14th 2019 as shown in Figure 9. Price has gained up to $65 or, in percentage terms, around 56%, since my 2019 article.
This breakout has exceeded the initial target level of the 61.8% Fibonacci level and is now nearing the 100% level.
Figure 9: GLD weekly chart as at end of July 2020.
Current Gold chart
These ‘before’ and ‘after’ screen shots reflect the value of patience in waiting for momentum-based trend line breakouts in any attempt to try and capture market movement on trading instruments. The trend lines in these previous chart patterns were from Triangles patterns but there is an entirely different charting pattern that I am currently monitoring on Gold. The pattern I am seeing evolve is that of a bullish Inverse Head and Shoulder and it is evident to me on both the monthly and weekly time frame but I will use the weekly chart in my analysis for this article.
Gold weekly July 2020
The chart in Figure 10 shows the current weekly chart of Gold and is free of all indicators except for the ADX momentum indicator in the bottom pane of the screenshot. This chart reveals that the precious metal is back testing the previous all time High region near $1,900. This whole-number region region was tested back in 2011 but there was never a weekly close above $1,900. This time around, we have already seen a weekly close above this level and this is a rather bullish signal in itself. The key will be for traders to watch for any new monthly candle close above this contested region.
Figure 10: Gold weekly chart as at end of July 2020.
The chart in Figure 11 shows the same weekly Gold chart BUT with my trend lines applied. To me, this Gold price action looks to be shaping up in a bullish Inverse Head and Shoulder pattern and I have labelled the two Shoulders and Head on the chart. The neck line of this pattern is drawn in at $1,900 and it is this level that will be in greater focus in the coming months. You can see that the Height of this technical pattern, from the peak of the Head (at approximately $1,100) to the neck line ($1,900), is about $800 in value.
The theory with these patterns is that any momentum breakout and continuation above the neck line might extend by the same order of magnitude as the Height of the pattern. This would suggest that any bullish continuation above $1,900 might extend by an amount of $800, to reach $2,700, and so this is a pattern well worth monitoring. The earlier charts in this article revealed that Gold behaved reasonably well from a technical perspective when it broke out of the previous triangle patterns. The hope would be that Gold might conform similarly well from this evolving Inverse Head and Shoulder pattern. As with all technical analysis though, or any analysis for that matter, future price action cannot be guaranteed and it is merely one tool in the arsenal that traders use in their approach to trading.
Figure 11: Gold weekly chart as at end of July 2020 with Inverse Head and Shoulder.
Before you get too excited thinking this is simply a matter of watching for any weekly hold above $1,900 there are a couple of things to note and I have further embellished this Inverse Head and Shoulder chart pattern in Figure 12 to help with my explanation.
You can see on this chart where the Shoulder part of the Inverse Head and Shoulder comes from. The pattern in Figure 12 has a clearly identifiable Left Shoulder (Left: as you look at the chart). However, there is no Right Shoulder to speak of as yet. Just because this charting pattern is overlaid on the candlesticks does not mean price action will conform, but, there is always the potential that it could. The Left Shoulder had actually developed over a period of time spanning almost 18-months and, in doing so, price action oscillated between $1,900 and near $1,500; a range of about $400. Thus, technical traders need to be on the lookout for any potential, and I might add frustrating potential, that a similar price oscillation might evolve here on Gold to form up the Right Shoulder. This is why I urge traders that, although this is a bullish pattern, they should not get too excited just yet. There may be a lot of patience required, just as patience was required in waiting for the triangle breakouts from the patterns I profiled in my January /February 2019 Your Trading Edge article.
Figure 12: Gold weekly chart as at end of July 2020 with Inverse Head and Shoulder.
There is one caveat I would like to add here. Should price action fail to oscillate under the $1900, and just continue on above $1,900 unabated, then this would suggest another bullish pattern could be in play: that of a bullish Cup pattern. The point to note here, though, is that the target for this bullish Cup pattern is calculated similarly to that of the Inverse Head and Shoulder. In this case it is referred to as the Height of the Cup and would suggest a target of $2,700 as well.
Figure 13: Gold weekly chart as at end of July 2020 with alternate Cup pattern.
Concluding comments
Gold, and a range of Gold based ETFs, made bullish chart breakouts from identified triangle patterns that were initially profiled in my January /February 2019 Your Trading Edge article. The precious metal is now setting up in a bullish chart pattern that could be identified as an Inverse Head and Shoulder or Cup pattern. Either way, both are bullish patterns and the suggested target is the same at circa $2,700. However, it will depend on how price action evolves over the following months that will define if one or other pattern has been correct in describing Golds next major market move:
- The Inverse Head and Shoulder would suggest potential choppiness covering a possible $400 range that might last over many months before any decisive breakout above $1,900 might evolve.
- The Cup pattern would likely be the cleanest and easiest to trade as the $1,900 is the clear threshold.
Both technical patterns are longer-term bullish patterns and suggest a gain of around $800 above the $1,900 level, which equates to roughly 42%, so these are charting patterns worth stalking. It is just that that one (Cup) is a bit cleaner cut than the other (Inverse H&S). Traders would be wise to investigate how the ADX indicator tracks along with this developing price action so as to gather clues about any next and significant Gold movement.
As mentioned earlier though, technical analysis offers no guarantee of any outcome but is simply a tool that traders can use to help them evaluate trading instruments. Traders should understand that all trading involves Risk and they should only ever trade with funds that they can afford to lose. Traders should always manage their trade size and their risk (potential loss amount) in accordance with their established and tested trade plan and appropriate to the current volatility conditions of the market.