While technical analysis or the discipline of assessing chart patterns is incredibly popular, the underlying patterns can yield almost endless interpretations. By now, commonly cited formations such as the head and shoulders or double top/bottom have joined terms such as price-earnings multiple in the common lexicon of equity research.
But then, a frustrating question comes up. What exactly is a “true” head and shoulders as opposed to a “fake” one? Nobody really knows. It gets worse when describing candlestick formations. Is a doji star a genuine doji if the final “plus sign” is a little wide (meaning that the opening and closing prices are close together but not identical)?
Again, it’s difficult to tell. The technical approach often ends up becoming Wall Street’s equivalent of a Rorschach test. Ultimately, humans see what they want.
Fortunately, investors don’t need to throw the baby out with the bath water. With the J-Pattern – or the J-Hook Pattern found under the Barchart Screeners section – traders have the opportunity to quickly assess market ideas that are signaling an optimistic framework.
The Anatomy of the J-Pattern
Per Barchart, the J-Pattern is a formation that is a part of an up-trending price action that takes a small dip before resuming the northward trajectory. Let’s use gold-mining firm Barrick Gold (GOLD) as an example.
You can think of the J-Pattern as a four-cycle formation: up, down, up, down. However, the second down cycle should be very modest before breaking out into a more decisive rally. Barchart attempts to signal to its readers the possible formation of the second down cycle, potentially enabling them to profit on the subsequent upswing.
In the case of GOLD stock, the first cycle occurs around June 17. It pops up to a closing high of $16.96 (the second cycle) before slipping down to $16.62, at the end of the July 2 session (the third cycle). From there, Barrick jumped up to Wednesday’s close of $17.78. This could be the eve of the fourth cycle.
Should the next few sessions be in the red (but not too deeply crimson), a J-Hook may have materialized. This gives traders some time to assess the situation and decide whether they want to speculate on the (potentially) incoming rally.
It’s a good time to remind ourselves that technical analysis is neither very technical nor a science. A lot of it comes down to guesswork and anticipating how others may react to the same data that we’re looking at.
Still, what makes the J-Pattern so compelling is that it appears to have some basis in rationality.
Fundamentals Support the Bullish Case for Gold Miners
While I’ve chosen GOLD stock as a test case for the J-Pattern, it’s noteworthy that the Barchart screener identified other gold plays, specifically New Gold (NGD) and Royal Gold (RGLD). In addition, nuclear energy specialist Cameco (CCJ) – which is primarily involved in the extraction of uranium – has also been identified as a prospective bullish opportunity.
Against a fundamental framework, the optimism in the broader resource trade makes sense. As Barchart contributor Quiver Quantitative noted, the “prospect of near-term interest rate cuts is bolstering the case for investors to remain bullish after a run in U.S. stocks.” Should the Federal Reserve become dovish in its monetary policy, that would be supportive of gold and other critical commodities (like uranium).
Enticingly, GOLD stock specifically could be undervalued. Right now, its shares trade at 2.68X trailing-year sales. However, between the first quarter of 2023 to Q1 2024, the average price-to-sales ratio landed at 2.71X. More importantly, analysts estimate that fiscal 2024 revenue could hit $12.91 billion. If so, that would imply a growth rate of 13.3% from the prior year.
Additionally, fiscal 2025 sales could soar to $14.57 billion, up 12.9%. In other words, the J-Hook isn’t just identifying technical opportunities for giggles. No, there are strong fundamental and financial factors that have facilitated the creation of the pattern.
It’s up to you to decide how you want to approach the next few moves.
Looking Ahead
For the J-Pattern to be in play, investors may anticipate a slight softening in market sentiment for GOLD stock. Ideally, the price shouldn’t fall materially below the $17.25 level. If bullish sentiment eventually picks back up in the next few sessions, that could be the confirmation that a longer-term rally is in play.
To be clear, the J-Pattern or J-Hook is not a guaranteed signal. It’s quite possible for GOLD stock to tumble. What Barchart does is provide its readers with an early warning that the framework has been established. Ultimately, whether you believe that the framework will lead to greater upside will depend on your due diligence and gut feeling of the market.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
