A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.
The head and shoulders pattern is one of the most common reversal formations. It is important to remember that it occurs after an uptrend and usually marks a major trend reversal when complete. While it is preferable that the left and right shoulders be symmetrical, it is not an absolute requirement. They can be different widths as well as different heights. Identification of neckline support and volume confirmation on the break can be the most critical factors. The support break indicates a new willingness to sell at lower prices. Lower prices combined with an increase in volume indicate an increase in supply. The combination can be lethal, and sometimes, there is no second chance return to the support break. Measuring the expected length of the decline after the breakout can be helpful, but don’t count on it for your ultimate target. As the pattern unfolds over time, other aspects of the technical picture are likely to take precedence.
There are signs that investors have become more cautious in joining the gold rush. The Relative Strength Index of spot gold has hovered in the lower 60s so far this month. In August, when gold surged 12 percent on a record-setting rally, the RSI exceeded 70 for 14 out of 23 trading days. A reading above 70 suggests the underlying asset is overbought. Holdings in the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust , remained unchanged from the end of August at 1,232.314 tonnes. In August, the fund posted its largest monthly decline in holdings since January.
Gold tried to test $1,900 twice and couldn’t sustain the level, therefore people are cautious this time. Volatile prices, and expectations that other central banks may step in to intervene in the currency market, may have also contributed to the restraint.