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A parabolic move is defined by an accelerating rise in price over shorter time periods, culminating in a rise that is almost vertical in slope. As you can see in the charts below, each successive trend line is steeper and steeper. But while it is easy to identify this pattern in its mature state, it is still challenging to pin point the exact top because it is at this very last stage that it can be the most volatile.
While a relatively rare pattern, it is one of the most reliable because no trend can accelerate geometrically to no end. Instead, the end result is an exhaustion and a total collapse and unwinding of the trend.
Trees Growing to the Sky
I wrote about the parabolic pattern in the price of crude oil before it collapsed under its own weight: What is Really Going on with the Price of Crude Oil? And like most technical analysis patterns, turned upside down, it works just as well. Reverse Parabolic - the Philadephia Banking Index flagged the exhaustion of selling in March 2009.
Putting aside all fundamental and emotional attached to the precious metal, the recent price action in gold marks a parabolic pattern and promises the same consequences. We’ve already seen this pattern play out in gold several times in the past few years. Here is a chart showing the parabolic move it made in 2006:
When will it hit the zenith? With a neckline at $1000 and a low made at $725, the clear head and shoulder formation in gold suggests a target of $1250. We’re not far from that.
Coincidentally, if gold were to hit that target, it would be 28% above its long term moving average. Although such an extremely lofty level is rare, it has occurred in the past. The last time was in early 2008 when gold topped out at $1000 in a similar parabolic move. And before that, it was the 2006 parabolic blow off which maxed out at +36% from its 200 day moving average.
Also noteworthy is that we’re seeing 3 parabolic moves in this market within a short period of time. While they are too few in number to make hard inferences from, they seem to be occurring with more frequency. Especially when you consider that before the first parabolic move in 2006, we hadn’t seen one for more than 20 years. But it was only 2 years later when in 2008 the pattern was played out again. And now, again in the last month of 2009 we see a parabolic pattern in gold.
CitiFX Gold Technicals
For another take on gold, a reader shared a recent research report from CitiFX which comes to much more bullish conclusions. They see gold reaching $1300 as early as the first quarter of next year and $2000 by 2012. To clarify, I’m not arguing that the gold bull is dead but that right now, right here, it has to take a rest to recuperate. It simply can not continue at the ever increasing rate of acceleration as it has.
In any case, you can download the 29 page report to read it for yourself from the Trading Resource Section (look for it in the Reports & Articles: “CitiFX Gold Technicals Nov 2009″). It is full of charts, interesting analysis and touches on the US dollar, as well as other markets.
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