Flag Breakout For XAU

11/22/06 08:51:44 AM

by Arthur Hill

Despite the potential for a massive head & shoulders reversal pattern, the Philadelphia Gold & Silver Index recently broke flag resistance, pointing to higher prices.

Security: $XAU
Position: Accumulate

Let's start out with the long-term picture for the Philadelphia Gold & Silver Index ($XAU) and look at the weekly chart first (Figure 1). $XAU surged above 130 in January and then embarked on a big consolidation that lasted the next 11 months.

FIGURE 1: $XAU, WEEKLY. Gold surged above 130 in January and then embarked on a consolidation that lasted the following 11 months.

Graphic provided by: MetaStock.

The pattern at work looks like a big head & shoulders reversal: the January high forms the left shoulder, the May high forms the head, and the right shoulder met resistance around 150. The neckline slopes down and a break below this support level would project further weakness below 100. The head & shoulders pattern is only potential as long as the index remains above the October low (117).

FIGURE 2: $XAU, MONTHLY. Note the triangle consolidation over a nine-month period.

Graphic provided by: MetaStock.

As long as the head & shoulders pattern is just a potential problem, it is befitting to look for an alternative pattern at work. Figure 2 shows the same time frame and a triangle consolidation over the last nine months. A move above 143 would break the upper trendline and signal a continuation of the prior advance. This would be enormously bullish and the upside target would be well north of 170. However, this pattern is as yet unconfirmed as well. The index simply remains in a one big consolidation and we are waiting on the subsequent breakout (up or down) for a long-term signal.

FIGURE 3: $XAU, DAILY. $XAU broke resistance around 130 with a surge in October and then pulled back to a resistance break in November.

Graphic provided by: MetaStock.

Until there is a long-term signal, traders and investors should focus on a shorter time frame for signals. On the daily chart (Figure 3), $XAU broke resistance around 130 with a surge in October and then pulled back to this resistance break in November. The decline formed a falling flag and broken resistance turned into support. $XAU bounced over the last three days and broke flag resistance. This signals a continuation of the October advance and reinforces support at 130. The upside target is around 150 and $XAU would have to move below 130 to negate this signal.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Flag Breakout For XAU

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