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Top in Gold?

by M.A. Nystrom
November 4, 2005

Iíve been watching what appears to an extended topping process in the gold market for the past several weeks. An extended head and shoulders top appears to have developed on the hourly chart, dating back to mid-September. The neckline of the pattern runs through about 462, a level that was violated a few days ago, opening up the market to a lot of choppy trading around the neckline. The decisive break came today, as gold closed down $4.40 in NY to end the week at 457.50

Gold1

The weakening of the advance to goldís recent high of 482 is clearly evident on a daily candlestick chart. Note the engulfing patterns at the tops of each of the right shoulders and at the head, as well as the spinning tops at the right shoulders, followed by the big declines down to and through the neckline.

gold2

The pattern implies a minimum decline in the neighborhood of 20 points from the neckline. To put the decline in context, such a fall would simply put the price of gold squarely back on its long-term trendline dating back to the metalís bottom in 2001. That trend line has seen several successful tests over the past few years. However, note that momentum has been declining with each new high, as shown by the successively lower highs in the MACD below. Should gold continue to fall, the upcoming test of this trendline will be critical.

gold3

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