Gold Technical Analysis Fake-Out

Gold has printed many technical patterns in the past year, some signalling a buy, others a potential sell. But how does it look when a technical pattern plays out very clearly, then suddenly flips seemingly out of nowhere. That just happened recently and highlights the importance of incorporating fundamental analysis into your arsenal.

The yellow lines above on gold’s daily candlestick chart highlight a large ascending triangle pattern, which is usually and aggressive buy signal. The price movements are expected to tighten up into the corner, then break through the price ceiling and rocket higher. The pattern is considered a failure if the price falls through the floor (number 1). A second sign of failure that indicates a further selloff may be on the cards is if the price tries to rise again but is deflected off the same line (number 2). Analysts often refer to this as a support becoming a resistance.

Despite these two bearish signals, gold suddenly pivoted and began an aggressive march upward to a new all-time high. Purely technical analysts we completely caught off guard by this while expecting the market to go lower and provide a better buying opportunity.

What this highlights is the importance of following fundamental analysis. In other words, looking at what is happening in the news. One of the general themes of recent is that the Federal Reserve has been holding out on cutting rates, which is usually very good for gold. The speculation has been rising however about them being pressured to finally cut. This pressure may come in the form of bad jobs numbers combined with inflation looking under control. These sorts of expectations can overpower technical patterns and get traders and investors frontrunning announcements.

While technical analysis has shown some very clear patterns play out, it’s important to remember that it doesn’t exist in a vacuum. Market fundamentals can quickly shift the tide, regardless of the technical setup.