Gold may no longer be Head and Shoulders above the rest

The dramatic rise of gold in the first quarter of this year has coincided with a general decline of the US dollar as well as pronounced turmoil in financial markets, particularly towards the earlier part of the year. With the dollar-denominated precious metal benefiting from both a weakening of the greenback as well safe haven flows when volatility recently shook the equity markets, gold reached more than a one-year high above $1280 just a month ago in mid-March.

Within the past two months, however, equities have rebounded strongly and the dollar, though still pressured by a cautious and seemingly dovish Federal Reserve, continues to vacillate on every unexpected word uttered by Fed members. This environment has helped to slow gold’s rise to the point where its momentum has been almost entirely stalled and it has formed what appears to be a potential topping pattern.

This technical pattern is a rather clear head-and-shoulders formation with its head at the noted one-year high above $1280, and its right shoulder having just formed earlier this week at around the same price level (approximately $1263) as its left shoulder that was formed in February. Generally considered a potential reversal pattern, a head-and-shoulders chart formation represents a market’s multiple failed attempts to rise followed by possible capitulation. The setup is typically confirmed on a breakdown below the “neckline” of the pattern, which in the case of gold is currently around the $1217 level, not far below the current price.

Any near-term resumption of stock market volatility and/or further pronounced weakening of the US dollar in the event that the Fed becomes even more staunchly dovish could invalidate this potential reversal pattern for gold. In the absence of these gold-supporting events, however, a breakdown below the head-and-shoulders neckline could prompt a significant fall for the precious metal, with initial downside targets at the key $1190 and then $1170 support levels. The pattern’s actual measured target would be around the $1140 level, another major support level for gold.

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