by Tom McClellan
May 13, 2011
Silver has been getting most of the attention lately among the precious metals, but gold’s chart offers us some really great examples of classical bar chart analysis that are worth paying attention to. If you have never read Technical Analysis of Stock Trends, by Edwards and Magee, you ought to make a point to read it because it is considered the bible of classic bar chart analysis.
Typically when discussing the important lessons of bar chart analysis, analysts focus on one tenet at a time. But this week’s chart features 3 great lessons in a single chart.
Lesson #1
Triangles Offer Measuring Objectives
Prior to its big move up above $1500/oz, gold had been constrained within a big triangle structure. The breakout from that triangle was to the upside, and so we can apply the measuring objective rule to figure where the upside objective should be. The green rectangles highlight how this is done. The height of the triangle gets added to the breakout point to arrive at the measuring objective. At the intraday high on May 2, the June gold contract just missed reaching that objective by a couple of bucks.
Lesson #2
Breakouts Usually Get Tested
When gold prices first broke out above the upper boundary of the triangle on April 5, it rose for a few more days but then the price fell back down to test the support offered by that upper boundary. This is an important point for all chartists to understand: broken resistance agents like that trend line can turn into support agents, and vice versa. At the point when it was clear that the support had held during the retest, that marked a great low-risk point to take a bullish stance for the extension of the breakout.
Gold prices have also pulled back down to the support offered by the rising bottoms line that formed the lower boundary of the triangle. A pullback like that is also normal, especially considering how far prices had gotten extended above that trend line.
Lesson #3
The Apex Matters
The point at which the two boundary lines of the triangle converge will often have importance for price action. That importance can occur either in terms of the timing of a future turning point, or in terms of price. Sometimes it matters in both ways. I have seen examples of prices returning back down to touch the exact price-time point of an apex.
In this instance, the apex coincided exactly with the top of gold’s up move. This is not unusual, and not all that rare of an occurrence. To see a different example of how an apex like this marked a turning point for the SP500, see the March 16 issue of our Daily Edition.
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