Gold Top Vs. Continuation Pattern
Trader Moe | Feb 02, 2016 11:33AM ET
Gold Elected to Start a H&S or Megaphone at the Critical Decision Point in its Red Price Channel.
Gold formed a price channel (red in chart above) on the approach to the top of its big falling wedge (orange in chart below).
Gold Falling Wedge (Orange) Bottomed with an Exact Touch of Wedge Bottom – Would Almost Always Mean a Lower Low is Coming.
Gold could have put in an upwards breakout from the red price channel to set up a melt-up breakout from its big falling wedge. But instead, in the critical decision wave of the price channel, it elected to start forming a top.
A topping pattern in this position can morph into a continuation pattern, but that is unlikely in this case. Gold’s low was an exact tough on the bottom of the orange falling wedge, at least on the April contract. That means gold is highly likely to top here to put in a lower low.
Also, the orange falling wedge has the minimum required touches on its sides. That means it would usually form a sideways bottoming pattern like a megaphone as part of completing the wedge.
So gold is highly likely to put a feeler through the top of the orange falling wedge before a fast move to 1000.
If gold gets bogged down forming a new megaphone across VWAP of the blue megaphone on the chart, it is likely forming a triangle (purple scenario). A triangle in this spot could mean a much lower low to come.
But the green scenario–a fast melt-down to 1000 and then an explosive move upwards to break out of the orange falling wedge to the level of the top touch on its top–is most likely.
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