Tuesday, June 8, 2010

Gold chart pattern - onward and upward?

In last month's analysis, I had observed that the 1 year gold chart pattern had made a new high at 1237.50 after breaking out of a bullish rounding-bottom pattern. But the break out was not valid technically.

Why? This is what I had mentioned as the reason:

'The gold chart pattern saw a sharp rise past the previous high of 1212. A 3% whipsaw lee-way means the gold chart needs to close above 1250 for the breakout to be technically valid. That seems just a matter of time.'

It has been almost four weeks, but 1250 has not been touched yet. A look at the 1 year gold chart pattern will reveal that every one's favourite yellow metal was catching its breath after reaching a higher altitude:


The gold chart pattern has spent the past four weeks in a symmetrical triangle consolidation pattern - which has already made two tops (the second lower than the first) and two bottoms (the second higher than the first). That is a sign that it is ready for a break out any time.

Triangles are continuation patterns but not very reliable, so the break out can happen either way. It so happens that at the time of writing this post, gold is trading above 1247. An upward break out has taken the gold chart to a new high, and within hand shaking distance of the 1250 mark.

Above 1250, the gold price will be in uncharted territory. The smoothly rising 200 day MA is indicating that no hurdles are in sight. Then why am I not feeling bullish? Two reasons.

First, it is better to be cautious near 52 week highs. Years of investing has taught me that to make money, one needs to be optimistic near 52 week lows and pessimistic near 52 week highs.

Second, the attitude of the young lady at the bank where I had gone to renew a FD account. On earlier occasions, she had tried to persuade me to invest in the bank's mutual funds and ULIPs. This time around, she tried to sell attractively packaged gold coins - one heart shaped, another with an embossed face of Lord Ganesha, and a 100 grams gold 'biscuit'.

The price? Even after a 4% discount on the coins and an 8% special discount on the 'biscuit' the rate was almost 10% higher than the market rate! The reason? It was 99.999% pure Swiss gold. That is why it was more expensive than 'local' gold!

Signs of a market top?

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