Gold's Parabolic Pattern
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Gold is exhibiting a textbook parabolic chart pattern that allures both bulls and bears alike. Gold traded mostly sideways from 1989 to 2003. Then the prolific rally of the last ten years ensued, ushering in gold's parabolic chart pattern. But where does gold go from here? I personally have been perplexed by this question. Does the gold rally continue because of global economic uncertainty, and/or because of a global fiat currency plurality? Or is gold just another risk-asset tied to the whims of investment cash flows, which would suggest that as the S&P 500 Index goes, so goes gold? From a purely technical perspective, does the parabolic nature to the chart continue, or does it spell imminent certain doom for gold prices? A lengthy discourse could be written in an attempt to answer these questions. Instead, I would like to merely present gold's chart pattern for what it is, a parabola, and hereby discuss it briefly in order to perhaps give you some perspective, not on gold's market direction, but rather on the essence of the parabolic chart pattern.
The first thing that you might hear from a chart technician is that all parabolic patterns are eventually unsustainable. Although the rate of increase in the global population ever since man's inception appears to be an indefinite parabola, as does the theorized exponential expansion of the universe, they are not markets which are governed by social mood. When tradable markets establish parabolic chart patterns, the rallies within these markets are eventually unsustainable. However, the following charts should serve to caution you against picking tops in these markets, regardless of the unsustainable nature of their rallies.
This first chart shows the beginning of gold futures' parabolic chart pattern, as the market moves to the 550.00/oz. area in late 2005.
This second chart shows the parabola reaching the 700.00 area by May of 2006.
The next chart shows the parabola at the 900.00 level in early '08.
The fourth chart shows gold's parabolic pattern at the 1200.00 level in late 2009.
And this fifth and final chart below shows gold futures' parabolic pattern to date. The all-time high has been just shy of 2000.00/oz. Notice that the market broke out of the triangular pattern that I have previously referenced (N.B. Triangular chart patterns can be either continuation patterns or reversal patterns, but prior to a break-out, there is no strong probabilistic tendency for either's occurrence.). Gold's next major resistance test is right here at the 1800.00 to 1820.00 level, while the all-time high is the only resistance after that. Support rests at the base of the triangle, at the 1500.00 - 1550.00 level.
In conclusion, gold's rally may or may not have run its course. But the charts shown should convince you not to accept anyone's opinion about their prescribed top in gold. A top, due to a perceived unsustainable parabolic nature, could have been anticipated at any of the junctures mentioned above. But gold continued to move higher. Simply put, the parabola is the most potent of the technically bullish chart patterns, and its demise is only confirmed retrospectively. This potency does, however, make corrections to the parabolic chart pattern violent as well. If you are long gold, consider your objectives for being long. Is a small portion of gold a permanent fixture in your portfolio? If not, and you are speculating in the gold market, either long or short, placing a stop loss order at a predetermined level is advisable. Finally, I am not advocating any position, long or short, in the gold market. I merely want readers to better understand how difficult it is to call the eventual market top for a parabolic chart pattern, and to also remind investors of the volatile nature of parabolic markets, a concept that some gold traders may have forgotten recently.
Dominic Cimino
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Preferred planning concepts, LLC & Cambridge are not affiliated.
© 2012, Dominic Cimino of Preferred Planning Concepts, LLC (You can explore the services offered by Preferred Planning Concepts by viewing us on our website at www.ppcplanning.com) Any redistribution, reprinting, or reference to this chart or content is allowed so long as reference to the author and source is acknowledged.
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