The Rounded Bottom of a Tower Pattern

Gold futures have settled with moderate gains on the day. The most active August contract closed at $1250.90, up approximately $5.10. This gain occurs immediately following two trading days in which the lows have been at the 200-day moving average, and their respective closing prices were below the 61.8% retracement.

As such, the last four days, as seen through the eyes of Japanese candlesticks, can be identified by two distinct candlestick patterns. Both patterns indicate support and a potential bottom concluding the recent price decline.

The first pattern is simply called “tweezer bottoms” and reflects the equal lows exhibited from the daily candles on the 20^th and 21^st of this month. According to Investopedia, “Tweezers are both a topping and bottoming pattern – patterns that indicate a shift in trend direction – although a broader context is usually needed to confirm the signal, since tweezers can occur frequently… A bottoming pattern occurs when the lows of two candlesticks occur at almost exactly the same level following a decline.”

The second pattern identified is a multi-candle pattern requiring a minimum of four candles, simply titled a “tower bottom.”  A tower bottom occurs at low price levels after a correction. At some point in the correction, typically when the market becomes oversold, a series of equal lows will emerge, creating a short-term bottom. This will be followed by a bullish candle, which will complete the tower. It is the formation of the long candles before and after the tweezer bottoms that resemble a tower structure. This corresponds loosely to Western technicians “V” reversal pattern.

Recently we have noted that the current correction in gold was reaching critical areas. How gold acted at these areas would define our models and expectations for the future price of gold. The two key technical studies we were focusing on were the Fibonacci retracement of the recent correction, as well as current pricing in reference to the 200-day moving average. Simply put, both prices together represent a technical “line in the sand,” so to speak.

The fact that gold prices traded to the 200-day moving average, but did not break below that is significant. The fact that gold prices opened just above the 61.8% retracement of the prior rally is also significant. More importantly, these two technical studies, when combined with candlestick patterns, have clearly indicated a high probability that gold prices have in fact found support and will move to higher ground from this price point.

Wishing you as always, good trading,