Gold Double Top: Start of Correction?
by Carl Swenlin 09/16/2011
In the last month or so gold has formed a double top that could be the start of a much needed correction for the metal.
Specifically the chart below shows an Adam & Eve double top. The first top is sharp and spiky, and the second is more rounded, depicting a labored attempt to reach the previous highs.
A neckline is drawn across the July price low, showing the support level that needs to be penetrated in order for the formation to "execute" (trigger expectations of lower prices). If it does execute, the minimum downside target would be about 1600. This target is estimated by measuring the distance between the first top and the neckline, and then projecting the same distance from below the neckline. It is interesting to note that the less accelerated rising trend line drawn across the January and July lows is rising at a rate that could provide support around 1600 if the correction proceeds. A steep rising trend line has been penetrated, increasing our expectation of further decline.
Gold is in a bull market, so bearish formations are less likely to execute; however, the parabolic rise seen on the monthly bar chart below is strong evidence that a correction is necessary -- a vertical ascent is not sustainable.
A typical resolution for a parabolic ascent is a total collapse back down to the level of the basing pattern that preceded it, but, given the fundamentals supporting gold, I think other options are more likely. A healthy correction like the one in 2008 is an outcome that would satisfy the need to stunt the vertical advance. Another outcome would be a high-level consolidation, which is where prices move into a trading range, in this case say, between 1600 and 1900 over a period of years, but, again, I think the fundamentals argue against that.
Bottom Line: I wouldn't dare say that gold can't continue higher, but the recent vertical movement of gold cries out for a correction to digest the advance. The recent formation of a double top gives us hope that a correction is beginning.
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Technical analysis is a windsock, not a crystal ball.
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