Gold Has Formed An Inverse Head And Shoulders, But Can it Be Trusted?

With all of the commotion in the gold market over the past few weeks, this week was tame in comparison.

The only thing of significance that occurred is that gold came close to the 2011 downtrend line and began to stall out. This wasn't much of a surprise.

So while things are fairly calm, let's zoom out and take a look at the big picture.

Gold inverse head and shoulders.

Gold has now completed an inverse head and shoulders pattern. Assuming that this pattern is not a complete fake-out, we can expect it to rise at least to the Sept 2016 high of $1343.70. That's about $6o/oz. above the current price.

Still, there are a few indications that should make us somewhat concerned about trusting this pattern. First, the neckline is downward sloping. This is generally less bullish than an upward sloping inverse head and shoulders. Second, volume has not picked up as the price broke through the neckline.

In fact, volume has fallen off a cliff ever since the right shoulder was formed. This gives me the sneaky feeling that there are a bunch of holders of gold sitting around waiting to sell once some arbitrary price point is hit.

But maybe I'm just paranoid.

The important thing to understand from this is that gold is in a strong long-term uptrend right now. And, if volume doesn't pick up as the price falls, then we should expect that uptrend to continue.

So we should mostly be looking for longs right now. But if we see a sudden spike in volume as the price goes down, this will be a signal to change our perspective and start looking for more shorts.

How to Trade Gold This Week.

Looking at the four-hour charts, gold had fallen into a pattern last week of bouncing upward every time it hit the 10 EMA. This week, it broke out of that pattern and has now formed a symmetrical triangle.

If the price breaks to the upside of this triangle and then pulls back, a trade can be entered right on the top line of the triangle at $1287.39, with a stop at $1285.29 and take-profit at $1293.42 (close to the 2011 downtrend line). This will yield a 3:1 reward/risk ratio.

Alternatively, a fall to the bottom line of the triangle at around $1279.11 will probably result in a rally back to the top. In this case, a stop can be placed at around $1276.99 with a TP at around $1285.48 for a 3:1 reward/risk ratio.

Keep in mind that the French elections are coming up on Sunday. So we may see extreme volatility.

For example, we may see a break up through the 2011 downtrend line on Sunday night if Marine Le Penne and Jean-Luc Mélenchon are the top two candidates . Or we could see a fall back through the 200 SMA if neither of them is in the top two.

But if this happens, we could see a reversal back to the current state of things by the following morning as traders conclude that the election doesn't really matter.

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