Time to lift our sight beyond Gold

By: Brian_Bloom

A “Head and Shoulders” chart formation is one of the easiest for a technical analyst (chartist) to spot, but many make the basic error of not checking for “confirmation”  of the pattern by examining volumes.

As a bull trend approaches an end, it can culminate in a bang (an explosion of hysterical buying pressure) or a whimper (a contraction of buying pressure). The Head and Shoulders is more reflective of a whimper.

What  happens is that instead of volume “pressure” pushing prices up, prices tend to float up as the numbers of buyers dwindle but hopeful holders hold on - tenaciously.

Against this background understanding, it is usual to see high volume on the left hand shoulder, followed by low volume on the head (as prices float up); and followed by low volume on the right hand shoulder.

Then, as the investor mood changes, from hopeful to fearful, the volume should rise following a break below the neckline of a head and shoulders pattern as selling pressure creeps in.

Below, courtesey stockcharts.com, is an analysis of the daily gold price over the past few months:

One problem that technical analysts are faced with in today’s environment is that there are large pools of money sitting on both sides of the bull and bear divide, looking to make a short term scalping profit;  and the evidence suggests that these pools are so large as to be able to influence short term outcomes. Since the advent of algorithm trading – which is effectively insider trading by those who have split-second earlier access to information – many short term charting techniques have lost their capacity to be predictive with any degree of  confidence. By way of illustration, the chart below is a 1 minute bar chart that shows trading in gold over the past five days.  (courtesy ino.com)

Note the dark “blobs” of blue – particularly on Monday, February 11th; and around midday on Wednesday, February 13th. Normally, the price of gold will move maybe a few cents in any one minute trading period. These dark blobs reflect several consecutive one minute trading periods where the price fluctuated by more than $2 within that minute. There has clearly been a battle raging between those who want the gold price to fall and those who want it to rise. The battle for supremacy has become bare knuckled slugging. In this context, one should be extra cautious of drawing conclusions from the head and shoulders pattern until after a break has manifested on high volume.

What “should” happen thereafter is that the price should float back up towards the neckline and then head south in earnest as selling pressure emerges and the stale bulls bale out.  What “will” happen is anyone’s guess.

It is because of this unfair price interference (from the perspective of the little guy)  that I have been focusing on the strategic implications of breakouts on the Point & Figure Charts. Suffice it to say that it’s time to move on in our thinking. Too much analysis can lead to paralysis. From an investment (and economic management) perspective, we need to focus on the likelihood that the banks will win this latest skirmish and, also, that they have no hope of winning the war. (None. Zero.)

In my view, we (all of us, including the bankers) need to understand the dimensions of that war and we need to see if we can pick a pathway forward.

The bottom line is that even if the banks win this skirmish, investors (including the banks) need to understand that we are not facing “more of the same”. We are facing an entirely new game with new rules of engagement.

What ordinary thinking people need now more than anything else is clarity of understanding and purpose. A modest contribution to that outcome is what my next few articles will, hopefully, contribute. They will also provide a background understanding of why I wrote my two novels and why it might be constructive for a broad spectrum of society to read them.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

Beyond Neanderthal and The Last Finesse are now available to purchase in e-book format, at under US$10 a copy, via almost 60 web based book retailers across the globe. In addition to Kindle, the entertaining, easy-to-read fact based adventure novels may also be downloaded on Kindle for PC, iPhone, iPod Touch, Blackberry, Nook, iPad and Adobe Digital Editions. Together, these two books offer a holistic right brain/left brain view of the current human condition, and of possibilities for a more positive future for humanity.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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