Reverse H&S Pattern in Gold

tools spotlight

Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

Last week, we received quite a few messages in which readers asked about the long-term reverse head-and-shoulders pattern in gold and related ratios. In today’s alert we discuss this in greater detail.

Let’s jump right into the gold chart (chart courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

The shape of the head and shoulders may not be evident on the chart, so we marked it with grey rectangles (one for the head and two for the shoulders). Generally, there are several characteristics regarding the reverse head and shoulders pattern that either make it reliable or rather insignificant. We’ll discuss the less important ones first.

The pattern should be characterized by U-shaped bottoms, it should be symmetric and it should be confirmed by volume. Neither of the above bottoms (head or shoulders) are U-shaped. Is the pattern symmetrical? Somewhat – the distance between the head and each of the shoulders is rather similar, but the head itself is not symmetric.

The volume should generally decline until bottoming along with the price in the right shoulder, with small upswings along with the price (in the final part of the left shoulder and the head). The volume should increase significantly only after the right-shoulder bottom. This is not what we can observe on the above gold chart. The volume was more or less steady between the first half of 2013 and the final part of 2015, with a visible uptick in Q3-Q4 of 2014 – not during a rally in gold, but during a decline in its price. The volume increased in 2016 and it’s been steady since that time except for what we saw two weeks ago. The volume picked up significantly in the second part of the head and it didn’t really decline before the right-shoulder bottom was formed – the volume spiked shortly beforehand and then it declined, but it was simply a seasonal issue (end of the year).

So far, the things that should confirm the reverse head and shoulders pattern in gold suggest otherwise. Having said that, let’s move on to the key issue.

Even if the above confirmations did indeed confirm the pattern instead of invalidating it, there would be no bullish implications for gold at this time. Why? Because there is no pattern to speak of – yet. In the case of the neck level based on the daily closing prices and the recent closes, there was no breakout above the neck level of the pattern.

The whole point of a pattern is that it has implications once it is completed and that’s not the case with the discussed reverse head and shoulders pattern in gold. If there were any meaningful implications of a given pattern before it was completed, then the part of this pattern would be a different pattern that would have a different name. For instance, a head-and-1.5-shoulders pattern or something more fancy. Either way, since the incomplete reverse H&S pattern is not known to be any pattern by itself, it does not have any implications – at least at this time.

If the pattern was completed, then the previously discussed confirmations (or more precisely, invalidations) would come into play and they would make the strength of the signal rather weak. Still, for now, there are no implications thereof as the pattern simply does not exist yet.

Now, on a short-term note, it doesn’t seem that we have much to add to what we wrote on Thursday and Friday. In particular, it’s important to keep in mind that there are more and more evidence that the interest for buying gold is spiking – just as one would expect it to at an important top. We have more reports of people that are generally not interested in the capital markets start to get really interested in gold. Additionally, the inflows to the gold ETFs are surging, which confirms that recent spike in volume. In the early stages of a huge rally – the one that will follow the final bottom – gold is mostly ignored and now many people are acting like $1,300 was the new $1,900.

Even if (again, this is not likely) gold is starting a big rally here, it’s still likely to decline in the short term as no market can move up or down without periodic corrections. The USD and gold markets are not exempt from this rule. Based on the way they perform after their turnaround, we’ll likely see what kind of big move is likely next. For now, it continues to be much more likely that the next big (!) move will be to the downside, not to the upside.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: initial target price level: $1,063; stop-loss: $1,366; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $38.74
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
JDST ETF: initial target price: $417.04; stop-loss: $43.12

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

=====

Latest Free Trading Alerts:

On Thursday, the European Central Bank released its most recent monetary policy statement. What does it say about the ECB stance and what does it imply for the gold market?

ECB Meeting in September 2017 and Gold

S&P 500 index lost 0.2% on Friday, as investors remained uncertain following economic data releases, among others. Will the broad stock market resume its uptrend today? Is holding medium-term short position still justified?

Positive Expectations As Investors' Sentiment Improves

=====

Hand-picked precious-metals-related links:

PRECIOUS-Dollar recovery pushes gold down from one-year high

Canadian gold mining company threatens to leave Greece

Gold Speculators Continued To Sharply Raise Bullish Positions This Week

=====

In other news:

Dollar Gains as Korea Fears, Irma Abate; Oil Rises: Markets Wrap

What to expect ahead of the Bank of England’s September policy meeting

China to ban production of petrol and diesel cars 'in the near future'

China Is Said to Ban Bitcoin Exchanges While Allowing OTC Trades