Technical Analysis: This Chart Pattern is Dead-on for Gold and Silver

Published Fri, Aug 31st, 2012   Lee Lowell, Income Specialist

Back on August 2, I was convinced gold looked poised for a strong breakout to the upside.

Not because of the fundamental demand for the product, but the bullish chart formation it was making. Here’s what the chart looked like at the time, when the October 2012 gold futures contract coiled itself into a narrow triangle.

As I said then, once a commodity breaks through the triangle to the upside, it should continue to blast higher. Sure enough, that’s exactly what it’s done so far…

In the current chart, you can clearly see that gold followed through with a nice uptick.

This is good news for those of you who sold the SPDR Gold Trust (NYSE: GLD) January 2013 $125 put options for $1.02 per contract. Those options have decayed down to $0.32 per contract now, which would allow you to buy it back and pocket $0.70.

If you sold 10 contracts initially, your gain right now would be $700. And if you don’t want to lock-in gains yet, you could hold off and let the options decay even more in price.

Gold wasn’t the only metal to take off after it formed a triangle pattern.

Silver was carving out a bullish formation of its own at the same time, known as the “ascending triangle.” Silver’s triangle was characterized by a flatter top, though, since the bullish momentum kept hitting a ceiling price. As you can see in the chart below, though, once prices breached the triangle’s wall, they blasted $3 per ounce higher.

That’s a $15,000 move on a single futures contract – in just six trading days!

Indeed, the market has certainly shown that these chart patterns can be reliable. You just have to wait for them to take shape.

And lucky for us, both gold and silver are carving out another bullish pattern as they take a breather from their latest run.

The “Flag” Formation

After a commodity surges higher, it’ll typically take a break and experience a short pullback.

In many cases, this action creates a “bull flag” chart formation: The quick uptick forms the “pole” and the pullback forms the “flag.” And usually, once the pullback reaches some sort of support area, it’ll trigger another rally.

You can clearly see the flag pattern forming in the chart below.

The move from $1,620 per ounce to the $1,670 area has created the pole part of the formation. And the pullback from the peak to the 200-day moving average line creates the flag.

And if the 200-day moving average line holds support here, gold will surely start another leg higher.

If you’re a believer, taking another stab at selling naked put options in the gold market via the GLD ETF, could be a good way to pad your account. And since silver’s once again following in gold’s footsteps, you can trade the iShares Silver Trust (NYSE: SLV) ETF, too.

Now, there are many differences of opinion between chartists and fundamentalists when it comes to trading.

The chartists believe that all public information is already factored into the charts, so you need nothing else to help guide your trading decision. The fundamentalists believe the only thing driving a market is its underlying fundamentals, regardless of chart patterns.

For me, I like to consider both sides of the equation to help pick a market’s most likely direction. And when it comes to gold and silver, I believe that both the fundamental and technical indicators are signaling a bull market ahead.

Invest accordingly.

Ahead of the tape,

Lee Lowell