Technical Analysis | Gold and Silver

by MomentumRider.com on March 16, 2012

Technical Analysis – Inverse Head and Shoulders Pattern

 

In this gold and silver investment blog, Momentum Rider will be demonstrating a technical analysis pattern called an Inverse Head and Shoulders pattern. It is a bullish reversal pattern that occurs after a strong downtrend and it can produce a very powerful uptrend. Normally, the Inverse Head and Shoulders pattern is much smaller in time duration and in amplitude than the one we will be illustrating in gold and silver. But, as we explained in a previous blog on gold and silver, this pattern is part of a very large consolidation phase for the precious metals (see Gold and Silver To Shine Brightly in 2012). The gold and silver Inverse Head and Shoulders patterns will have significant upside energy because of their large size if they finally break out above their necklines. This will be explained in more depth later in the article.

First, it is worth spending some time telling you more information about what this pattern is. In addition, we will be using some specific examples that should prove useful for your understanding. The Inverse Head and Shoulders pattern is a chart pattern used in technical analysis that predicts the strong reversal of a downtrend. The Inverse H&S pattern is broken down into three smaller parts. Note that you may also see this pattern named an “Inverted Head and Shoulders” or a “Head and Shoulders Bottom”.

The first part of the pattern is where the price falls to a low or trough from a downtrend and then rises back up a percentage of the previous downtrend (left shoulder). The second part consists of a fall to a lower price than the first trough low and then another rise back up (head). The third part of the pattern is a fall from the uptrend from part 2 that does not go as low as the second trough or the head (right shoulder). The right shoulder low frequently doesn’t get as low as the left shoulder low. Finally, the rise from the third trough low takes it to a breakout line connecting the highs from the left shoulder and right shoulder (neckline). Typically the average volume in the shoulders is lower than average volume in the head phase. Two chart examples are shown below:

Example 1: Breakout Above the Neckline On Volume (Safer Entry With Pattern Confirmation)

Technical Analysis 1

There are two recommended ways to take advantage of the powerful Inverse Head and Shoulders pattern. The first is to identify the pattern early and to buy in the trough of the right shoulder. The second way is to wait for a high volume breakout of the neckline. Playing the breakout is generally a safer entry with full confirmation of the pattern. Buying in the right shoulder trough has more risk but it can be more profitable because of the lower price entry.

The chart below is an example of an Inverse Head and Shoulders pattern that Momentum Rider identified for subscribers in the middle of 2010. Obviously, it was very successful and profitable for us. It was part of a bottoming process for the S&P 500 similar to what gold and silver looks like right now. Note that this pattern is fairly deep and long in duration at about 4.5 months. That large depth and long duration helped to provide a very powerful move up that followed the breakout from the neckline.

Example 2: Breakout Above the Neckline a With Strong Run Up in 2010 for the S&P 500

Technical Analysis 2

Technical Analysis Charts – Consolidation and Energy Buildup Phase:

Momentum Rider has written numerous recent blogs supporting much higher prices for gold and silver in 2012 and for several years to come. In fact, we already explained the concept of consolidation phases and energy storage and buildup for bigger moves. Here is a quick snapshot of those previously published charts from our March 8th blog. This concept is important to understand because it supports our higher risk recommendation of accumulating in the right shoulder price areas without waiting for the neckline breakout on high volume.

Buying gold and silver right now does add risk to the trade because the right shoulder trough could breakdown. If the right shoulder price goes below the head’s low price, then the pattern is negated and the bigger move up in silver and gold may not happen as we anticipate.

Silver Energy Buildup Phase (Technical Analysis):

Silver Prices and Gold Prices 3

Gold Energy Buildup Phase (Technical Analysis):

Silver Prices Gold Prices 2

Technical Analysis Charts – Inverse Head and Shoulders Pattern

Because of our fundamental and macro event premise that gold and silver will go higher in 2012 and for years to come, Momentum Rider believes that there is a bullish Inverse Head and Shoulders pattern forming in both gold and silver. Furthermore, for reasons that we discussed above and in our previous blogs on this subject, MR is recommending that you start accumulating gold and silver during this choppy period of consolidation in the right shoulder patterns right now.

Refer to the charts below for the recommended accumulation price range for your gold and silver buys. Also, you can add to your long positions after a breakout above the necklines as noted on the charts.

For gold, the accumulation range is between $1,585 and $1,740 with a neckline breakout level of $1,775.

Technical Analysis 3

For silver the accumulation range is between $29 and $34 with a neckline breakout level of $36.

Technical Analysis 5

MR recommends that you start accumulating gold and silver in the form of ETFs, mining stocks, coins, jewelry, or even bars if you have a good way of buying and storing the actual metal. But please be careful with any company you buy gold and silver from and those companies that claim they will store it for you.

Another parabolic move in silver and gold prices similar to what happened in 2010 and 2011 is very probable and it could be even bigger this time around. Using technical analysis studies and past experiences with large Inverse Head and Shoulders patterns in markets, the next moves up in gold and silver could start in April and the duration and size of the moves could be substantial.

The simplest and probably the safest method to accumulate gold and silver is to buy the ETFs. The Silver ETFs MR likes are SLV or SIVR and the Gold ETFs are GLD or IAU. Start buying in small amounts right now and on any pullbacks before the big momentum move really kicks in. Watch for Momentum Rider’s frequent updates on gold and silver prices in blogs and in the MR Power Stock Newsletters.

Keep learning more about technical analysis and look out for this very powerful Inverse Head and Shoulders pattern in the future. Take advantage of this investment opportunity in gold and silver as it could end up being one of the best things you could do for your retirement account in 2012.

 

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Good luck in your trading and investing,

Keith Hugenberg
CEO Jalexa Trading Consultants, LLC

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