It may be one of the oldest technical analysis patterns in the world and here it is once again, this time on the monthly gold price chart. When the head and shoulders looks upside down — inverted — the technical analysis wisdom is that a base has formed and direction of price has changed.
In his classic work on price chart interpretation, Technical Analysis of Financial Markets, John Murphy provides the best, most detailed explanation of the pattern.
Basically, you’ll see a low, a rally that fails to exceed the previous high, then a lower low, another rally and then a low that comes in higher than the previous low followed by an extended rally that takes out the neckline formed by the 2 previous highs.
Too many words at once, right? To understand the pattern, it works better to look at an example. For that, here’s the current monthly price chart for gold, annotated:
The left shoulder forms with the low in 2013. After a rally that fails to take out the previous high, gold moves to a lower low in late 2015 — that’s the head in this inverted pattern. After another rally, another low comes in — the right shoulder — but this time above the level of the previous low.
The inverse head and shoulders is confirmed when the price moves above the neckline created by connecting the progressively lower highs from 2013 to the present. It would be nice to see more volume come in but the month is not over and it’s not necessarily a requirement.
Some of the key gold mining stocks are confirming the pattern of the underlying metal by hitting higher highs for the year. I wrote about the beginning stages of that 2 weeks ago here and now a few more in that sector have established new 2019 highs as well.
Here’s the daily chart for Newmont/Goldcorp, for example:
You can see this week’s gap up as the gold price took off. Newmont, the largest of the New York Stock Exchange-listed miners has broken above the resistance at 36.50 where the previous February and June peaks came in.
Here’s Barrick Gold daily price chart:
It’s the same pattern: the highest price of the year after breaking above the previous peaks. NYSE-traded Barrick hit a high in March and re-visited it earlier this month — then, this week, broke out.
One more: the Franco-Nevada daily chart:
This low-volume gold miner, also New York Stock Exchange traded, met the March high in early June and has now gapped up above that level.
These 3 precious metals miners are all components of the widely followed VanEck Vectors Gold Miners ETF which traded 50 million shares on Friday as it hit new 2019 highs. Here’s the chart:
So, the mining sector noticed the break above the neckline on the gold inverse head and shoulders pattern this week. It’s likely all of this is an indication that market participants are seeing greater risk these days in other investment areas. It’s also likely that enthusiasm for the sector might be overdone at this point and that backing and filling may be in order.
I do not hold positions in these investments. No recommendations are made one way or the other. If you’re an investor, you’d want to look much deeper into each of these situations. You can lose money trading or investing in stocks and other instruments. Always do your own independent research, due diligence and seek professional advice from a licensed investment advisor.
