Gold Cup and Handles

The cup and handle pattern is one of the most prevalent and reliable technical patterns. It occurs often and in short, medium and super long-term time frames. Technical analysis is not an exact science. In fact it is more an art than science. The formation of a technical pattern doesn’t imply infallibly, that the pattern will complete itself according to textbook manner. However, I find that the cup and handle pattern completes itself far more often than any other technical pattern. Its record is very good.

In this update I want to take a look at the pattern in the context of the Gold market. Our first chart contains two examples of the pattern. Note the three stages of the pattern, which follow the formation of the cup. The first example occurred from 1996 to 2004, while the second example occurred inside of the larger pattern, from 1999 to 2002. Notice how both patterns completed the three phases? (Initial pullback, breakout, retest and blastoff).

The rule on price targets is first and foremost arithmetic and then logarithmic. In the first example, the price targets would be $363 and $398 for the logarithmic. In the second, the targets are $593 and $702. As you can see even the logarithmic price targets played out in both cases.

Now let’s focus on the big picture and what is about to happen in this gold market. Take a look at the Gold chart below (from bigcharts.com). Gold is just starting to emerge from this nearly 30-year cup and handle pattern, which has a massive base at $700 to $730.

Remember the three stages? Initial pullback, breakout, retest and blastoff. The market is now at the blastoff phase. In terms of the targets I come up with $1,205 and $2,087. I should also mention that the next strongest Fibonacci targets are $1,500 and $2,300. I neglected to mention that in the cases seen on the last page, the targets were hit in less than a year (after the pullback to support). I would be surprised if our target of $2,087 wasn’t hit within two years.

As we mentioned, technical analysis is not an exact science. It should be utilized in tandem with fundamentals and sentiment. Most readers of this website are well aware of the bullish fundamentals of Gold. We don’t need to tell what you already know. In terms of sentiment, I believe we are fast approaching the point of recognition. I have been writing about this for several years and prematurely expected the point to be imminent.

The point of recognition by the way is sort of the herd realization of the bull market. Why is the herd realization coming soon? First, let’s look at the deflationists. Most of them seem to believe that inflation will be coming, though very far into the future. The reality is that Gold advances and outperforms well in advance of an inflation cycle. During the cycle it is non-gold commodities that perform best. The deflationists will capitulate as soon as Gold hits a new all time high. The average investor is starting to realize the inflationary future. Moreover, they are starting to realize there are few viable options outside of precious metals. We think a stampede into precious metals will begin later this year.

Here is our rough projection for the future. Look for the market to make a final pullback before the most exciting phase begins. The moving averages are starting to align and in a few months should provide a solid base near $850. This market is just months away from an explosion to new all time highs. $2,300 is our target by year-end 2010.

That’s all for now. Good luck!