Golden triangle foreshadows major breakout

After rallying straight from below $1,200 to nearly $1,400 over the first 10 weeks of the year, gold pulled back(COMEX:GCM14) toward $1,300 in late March and has been consolidating in that area ever since, frustrating bullish and bearish traders alike. Despite the exasperating trading conditions of late, a developing technical pattern suggests a breakout and possible new trend could form as soon as next week.

As the daily chart below shows, the yellow metal has been putting in a series of lower highs and higher lows over the last month, creating a textbook symmetrical triangle pattern. This pattern is analogous to a person compressing a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction.

Beyond the symmetrical triangle in the price of gold itself, the RSI indicator is also forming its own corresponding triangle pattern. As a general rule of thumb, a breakout in an indicator tends to lead, or at least confirm, a breakout in price, so traders may want to keep a close eye on the RSI heading into next week.

While it’s notoriously difficult to determine the breakout direction in advance, knowledge that a strong continuation is likely is still valuable for gold traders. For instance, more aggressive traders could consider a “straddle” trade (looking to go long on a break above resistance or short on a break below support), whereas more conservative traders may want to wait for a confirmed breakout before trying to take advantage of a continuation in the same direction.

If we see a bullish breakout above the top of the triangle and the 50-day MA next week, Gold could quickly rise to the top of the triangle at $1,330 or Fibonacci retracement resistance around $1,345 or $1,365. On the other hand, a bearish break would likely target the 3-month low near 1,270, followed by longer-term Fibonacci support at $1262 (61.8%) or $1230 (78.6%).

 

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com.  Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, Matt utilizes candlestick patterns, common indicators, and Fibonacci analysis to predict market moves. You can reach Matt directly via email (mweller@gaincapital.com) or on twitter (@MWellerFX).

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