Wednesday, 19 June 2013

Similar chart patterns in gold and silver from 2009 onwards and perhaps their ominous implications, especially for silver near term. 2013-06-19

Similar chart patterns in gold and silver from 2009 onwards and perhaps their ominous implications, especially for silver near term.

In July 2010, I became fascinated with the similarity in the chart patterns for gold and silver, with silver’s pattern leading gold’s by a time period approaching a year. The time gap was later to reduce to about 4 months.

These patterns, though I didn’t realise it at the time, evolved into something similar to the Three Peaks and a Domed House pattern that I saw much later described on an internet article relating to the S&P500 index late last year – and also perhaps relating to various stocks in explanatory articles on the web.

At the start, I thought this pattern was probably chart technician’s mumbo-jumbo but it has struck big time in my two favourite markets, gold and silver. Perhaps this is actually a very powerful mid-term price pattern. (For the 'idealised' pattern, please see end of article.)

The early evolution of this pattern is very bullish if you can catch the breakout after the multiple peaks occur. I had noticed in July/August 2010 that both gold and silver had multiple tops with various patterns either side that were very similar in both cases. I did post this on my blog soon afterwards. I then revised the charts once silver had its massive breakout to a peak near $50 in May 2011 and proposed that gold might follow. To my somewhat amazement, gold broke out in mid 2011 and put on $400 from $1500 to over $1900 in a matter of several weaks before peaking out at $1920 at the beginning of that September.

Much later, I was reading about the Three Peaks and a Domed House pattern and realised that I had witnessed very similar activity in gold and silver already.

Importantly, once the pattern is completed with the blow off domed house top, the implications of the pattrn are highly bearish, with the target being a return to the price at the very beginning of the pattern, as far I can grasp from what I have read.

Presumably the multiple peaks could represent some kind of distribution of the asset concerned, from strong hands into weak hands. When gold reached $1430 in Nov 2010 and then made a lower high soon afterwards, I thought that it was rolling over and an important top might be in play. The run up in price from the $681 low in October 2008 to $1430 in Nov/Dec 2010 had been excellent, more than a double, without any substantial correction, so one seemed due.

However, the gold price took a moderate correction to $1309 approximately and then went up again on its merry way in early 2011, having some choppy action again at the 1400-1430 level and then eventually moving up to $1577 as silver topped at $50. Gold’s action was subdued compared to silver’s at that time. Most of the time silver had been making new bull market highs and gold was struggling to break to a new high until finally gold broke up from $1430 to $1577 just before silver topped out at $50. There was a noon-confirmation for a long time and when the confirmation actually arrived, it signalled that silver’s run was about over! I wondered if Dow Theory had any similar features.

Later in 2011, when gold made its magnificent breakout as was implied from my old chart patterns, I noted that silver had a rally but failed to make another new high above $50. It could only make $44.28 as shown on the weekly chart in August 2011. This second non-confirmation still stands and was a very bearish sign (isn’t hindsight wonderful)! Crucially, we saw a much higher high for gold and a lower high for its sister silver in Aug/Sept 2011.

The rest is history. Gold is now $1360 and silver about $22.

The targets for gold and silver formed by the completion of 3 Peaks and a Domed House patterns are $1155.60 and $12.44 respectively, a fair way below today’s prices!

Perhaps we could be kind to silver and read the January 2010 low as the start of its pattern and then the target would be $14.65.

The start of the main August 2010 breakout in silver was about $17.50 and in gold it was $1309 in Feb 2011 prior to their respective breakouts. Gold has already nearly retraced the entire breakout but silver still has some way to go.

Presumably if the pattern actually represents some investor psychological reality, the ‘distribution’ near the start of the pattern has to be undone and the lower targets could have more validity. It is also interesting to note that the breakout after the multiple peaks going up to the final top has 2 stages with a decent correction inbetween (sometimes referred to as the ‘first floor’ of the house in other internet articles).

Gold’s current struggle to get above the $1400-1430 region recently is testament to this. It is again fighting the battle of November 2010. Maybe the weak hands that were evidently buying there in late 2010 are being challenged as we speak.

Take a look here. I have just seen n article from Lorimer Wilson that mentioned this in early 2011! He was premature with the prediction of the final top but what observation!
See also:
“Three-Peaks and a Domed House” Pattern Suggest Gold Will Plunge to $1,300/ozt!"
from 6 November 2011
I am taking a deeper look because I think the Dow 30 and S&P 500 are now exhibiting similar patterns to gold and silver in 2010-2011. Will the consequences be the same?

This diagram is similar to one I found on Market Oracle here:


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