This is What a Breakout Looks Like

Every once in awhile a textbook chart pattern materializes on a chart. Technical Analysis is not a perfect science and sometimes patterns fail as predictors for price movement. On the balance what can be said is that chart patterns work more times than they do not. The pattern in gold chart has been consolidation triangle or sometimes called a pennant. They usually occur after a big move in price and represents a period of time where the big price move is digested by the market. Any large run will attract participants wanting in on the action. Eventually the market runs out of speculators willing to enter the market at elevated risk levels, and a period must come where price again attracts speculators. Think of a spring being stretched. When the spring finally is let go it returns to a state where there is little tension. A spring will oscillate between extremes and eventually settle to a static and un-tensioned state. Market price action does the same. When you see one of these patterns, think of a spring turned on its side and each swing low and high within the pattern represents a coil. As price bounces within the boundary of the pattern, another coil is formed that holds tension. Eventually that tension is released in the form of an explosion in price.

Often the price explosion is in the direction of the prior move in prices leading up to the pattern. It is why these patterns are referred to as continuation patterns. Sometimes price will go opposite and the pattern fails as a continuation pattern in that it did not predict properly the future in prices. But, these patterns predict future price action more times than not. Here is a textbook consolidation triangle. It normally breaks at the 2/3 distance to the apex. This one did. The projection for one of these is made by measuring the height of the triangle at its highest point and then projecting that distance above from the breakout. In this case, GLD is projecting an 11 dollar increase from 150, or 161. This is approximately 1650 for gold itself. This current move is very steep and really is not likely to continue unless the wheels are really coming off the global financial system. A swing low back toward the breakout point is likely, perhaps to the 18 day moving average. This would be an excellent buying opportunity.

This entry was posted in GLD, Gold, Matrix Sentry TA, Technical Analysis. Bookmark the permalink.

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