Classic Technical Analysis in gold

  

Foreign Exchange and commodity traders around the world are this morning watching the development of a classic head and shoulders formation in gold. We wrote about a possible top in gold when it started to develop last week (The US dollar sticks to the script). On the daily chart, the “head” can clearly be seen in the middle with the two “shoulders” on each side, although the one on the right gives the setup the aspect of an actor rehearsing for the part of Richard III in Shakespeare’s play of the same name. The unfortunate Yorkist king had a curvature of the spine that resulted in him holding one shoulder higher than the other.

In any event, for this Technical Indicator which now, along with the plays of The Bard of Avon can be described as a classic, to play out, price at the hard right hand edge of the chart will have to descend below the support level as marked by the block arrow. The fundamentals are in place: in spite of a recent disappointment in the US Non Farm Payroll report figures, the Fed is bent on removing the stimulus that has supported gold over the last few years. As always, it is also the Fed’s job to ensure that reversal does not result in market volatility, so its chairman and its members will continue to manage expectations, as best they can.

The dominant trend for gold is still down, and technical indicators, such as the Head and Shoulders, still maintain something of the nature of a self-fulfilling prophecy.