Daily Form October 6, 2009

Detecting Profitable Patterns For Active Traders

Successful trading without having to be right about the underlying market direction

TUESDAY OCTOBER 6, 2009       05:58 ET

The weekly chart below for GLD, the exchange traded fund which tracks the spot price of the metal, is at a very intriguing juncture and today’s commentary will be focused on some analysis of the precious metal.
The lines drawn in are pointing to a head and shoulders continuation pattern - where the H&S pattern is inverted - and as a continuation pattern, the break-away- if and when it comes - could be quite explosive.
The metal is trading at about $1020 as this is being written and is clearly in contention for a break above the neckline which lies in the near vicinity.
The price targets and an alternative interpretation of the pattern is provided in the diagram below.

The stylized diagram below shows the framework for the H&S continuation bullish pattern with the price target being the distance between the top of the (inverted) head and the neckline.
I have also sketched in an alternative pattern - based on (but slightly modified in my construction) the CANSLIM cup and handle template - which is another way of "seeing" the price development and which also has the potential for an eventual major breakout to the upside.
The target would be the distance from the neckline to the top of the inverted head which is approximately $350 so that would give an upside target of approximately $1370.

The point and figure diagram for weekly closes on the GLD fund are also indicative of the H&S pattern and could without too much imagination be construed as approximating the CANSLIM based pattern as well.

The 4 hour chart - this time for spot Gold - taken as this is being written, is also revealing the same broad characteristics alluded to already.
The coincidence of the pattern across multiple time frames - reflecting a fractal view of the price development which is internally coherent, suggests that we should pay close attention to this pattern as it evolves over the next few sessions.
I have added the possibility of another pullback pattern which might emerge on the 4 hour chart but which would also conform to the emergence of (yet another) nested cup and handle formation.
Of course it is conceivable that there could be a more serious failure at the neckline which would almost certainly lead to a major sell-off of the metal, but, at least at present, the scenario is leaning towards a break above the neckline. As already suggested this would set up $1370 as a feasible target, perhaps in a hurry; with even more substantial advances a distinct possibility as a febrile desire not to get left behind in a headline grabbing price move could create a manic phase of buying.