GLD - H&S Top Target

In yesterday's comment section, ghamal asked, "Would the target for the H&S break on GLD be 70?!"

To calculate a H&S Top target, find the distance between the high of The Head (98.99) and where the neckline was (86.33) on the day when the high of The Head was put in. 98.99 - 86.33 = 12.66 points of downside. Subtract that from where the neckline was (87.19) on the day that the pattern was broken.

On April 6, the GLD gapped down below the neckline, so 87.19 - 12.66 points = Target: 74.53 IN PLAY. Notice that if the target should get MADE, that would be a gap fill of the December 5 close of 74.52. December 5 was a very significant day. The candle that day violated the top of the Symmetrical Triangle intraday, but stuck the close at the top of the pattern on a Bullish Doji Star Hammer. The next session was a gap up Bullish Island Reversal, leaving the December 5 candle as an "island," detached from the prior session, and also detached from the session that followed. The GLD exploded higher to the Symmetrical Triangle target of 85.39, and a bit higher than that.

ghamal also asked, "And when would you know if the H&S scenario is wrong?"

That's a very good question, and it isn't always easy to determine. Let's look at the patterns on this chart, and I'll show you what I mean.

The first pattern in September-October, 2008 is a Descending Triangle. On October 16, it broke down convincingly, putting a target of 69.77 IN PLAY. The very next session, however, the GLD ran up for a retest of the bottom of the pattern, which is a bit of a knuckle-biter for anyone who is short. What will we do if the GLD trades back above the pattern, intraday? What will we do if the GLD closes back inside the Descending Triangle?

In this particular case it never was a problem, answering those questions. The GLD never made it back to the bottom of the pattern. It went back down and closed on a Long-legged Doji candle and the target ended up getting MADE three sessions later.

The next pattern, October-December, 2008, is a Symmetrical Triangle. On November 21, while the rest of the market was putting in new lows, the GLD exploded out of this pattern. It put in a high the next session, then came all-ll the way back to the top of the pattern, and on December 5, went well below the pattern, intraday, and filled the November 20 gap. That intraday violation was a horrible Bear Trap because, as we discussed above, the close was back above the Symmetrical Triangle, and the next session was a Bullish Island Reversal. Bears who shorted the intraday violation were trapped. Would we have sold the intraday violation? That's up the individual, but you see why I say that it isn't always easy to make those decsions. We couldn't know during that session that the intraday breakdown was a HUGE trap!

The third pattern (in purple) is a Bear Flag. It broke down, but found support above the Kumo (Cloud). I almost shorted that pattern and posted on it, but fortunately, I looked at the SLV chart which looked very bullish, and got long the SLV. On January 16, the GLD closed back above the bottom of the Bear Flag, but just TWO cents! Ugh. That's a tough, tough decision, whether or not to remain short (if one is short) in a situation like that. Some players will wait for two closes back above the pattern. Personally, I get outta there on a close like that (I was long the SLV at that time, so it didn't matter). The next session, the GLD gapped higher and closed well inside the Bear Flag. Anyone staying short at that point is stuck "hoping" that they'll get saved, and that the GLD will go back down. They were in serious trouble when the GLD gapped higher again, three days later.

Finally, this "possible" H&S Top. I don't have a position, but if I did, I would cover a short on any CLOSE back above the putative neckline, which comes in today, April 9, at 87.273. The slope of the neckline rises 0.02767 per day, so add that amount each session. There's no trading on Friday, so Monday, the neckline will be at 87.30.

A close back inside a broken pattern always puts the target ON HOLD, meaning that maybe the pattern breakout or breakdown was a fakeout, or maybe the move back inside the pattern is the fakeout. That's why I usually throw it in if I get a CLOSE back inside a pattern. It always can be re-shorted (or re-entered long) if it breaks out or breaks down again.

Yesterday, the neckline was at 87.23. The GLD opened just below it at 87.18, rallied back inside the pattern to 87.53, then reversed and closed down on a black candle. That's the second session in a row that the GLD tried to regain the pattern, but failed, so the breakdown still is valid.

Again, if the GLD closes back inside the pattern, the breakdown would be highly suspect and I would cover if I were short (I have no position)

Sorry that this is so lengthy, but I wanted to give some "real life" examples of these decisions that we have to make. They aren't always easy.