What is the Bearish Head and shoulder pattern?
The Bearish Head and shoulder pattern represents a trading pattern consisting of one lower top as the left shoulder, another highest top (head), and another lower top (right shoulder). This pattern with strong resistance usually signs a future bearish trend.
You can now see the bearish head and shoulder pattern on this screen.
And when we trade gold, we can see this kind of pattern very often on four-hour daily and weekly charts. I want to tell you, too, that there is another pattern that’s very similar to the head and shoulder pattern. It’s a double-top pattern. So you have the first top, then you have a neckline, then you have a second top, and then you have a trend break.
You can see right now on the screen:
Gold monthly chart. On this monthly chart, we can spot exciting patterns. We had two highs in the last couple of months, and now we are some bearish move. If you zoom in on this picture, you can see what I’m talking about. We can see two tops and some bearish moves right now that we need to describe technically and explain this in the fundamental approach. So let me see again, on the left side, we have the current double top monthly chart pattern, and I think it’s evident.
Whereas the first stop second top neckline breaks. And right now, we are in the moment when the neckline breaks are over, and we are in a bearish, bearish move on a monthly chart.
This summer, we have a head and shoulder pattern on the four-hour chart. So this summer can provide the potential bearish trend for the gold price.
If you go to the four-hour chart (image above), you can see in June that we have one high, then they had a head, then a second shoulder, and right now, we’re in a bearish move. Both indicators head and shoulders and double top on the monthly chart show a bearish trend. The good thing is the monthly chart bearish trend can be very, very long moved. So, we can have exciting spots to enter bearish trades all summer. Now we will try to describe this and answer the critical question why did this happen?
The interest rate in the US in the last 200 years
The first thing you need to know is that something has changed in the US market, and that is an interest rate hike.
We had a very low-interest rate during 1945 when the country wanted to raise the stocks and have more impact on development.
Everything that happens, there is some story behind that. As you know, the interest rate in 2008 was 2.3%, but inflation and interest rate were no problems. Fourteen years ago, there was a crisis in real estate. But when the crisis started between the two seven and two eight, interest rates fell from 5.1 to 2.3 to curtail the subprime mortgage and banking crisis. And right now, we are trying to increase interest rates because we want to fight against inflation. So what happened on March 16, 2020, when it was a corona disease? The Federal Reserve interest rate was between zero and 0.2%. On March 17, we had an interest rate rise from zero point 25% to 0.5%. And in May, just two months later, we had another interest rate rise to 1%. And this is not the end.
During this year, we can see interest rate rises, and this can happen just as a tool to fight against high inflation. And on the end, what we need to know is there is a scientist that will tell you that interest rate and the gold price, there’s no impact there, and there is no strong correlation. But if you just saw this graph in the last 20 years, you can see one essential thing. The thing that I want to tell you is straightforward. You want to increase the interest rate to fight against inflation, but you want to slow down your economy. Then when you do that, one essential thing will happen. Your currency, the dollar, in this case, will be stronger and stronger.
When we trade gold, we know that the gold price is the ratio between gold and the US dollar. So when I say 2000 gold, gold prices. So at that moment, you know if the dollar is stronger, the gold needs to be weaker. And if you see this in 20 13, 20 12, we had a considerable gold price, almost $2,000. And as you know, the interest rates were negative. Again, if you look at 2016 and 2017, you can see just like in the mirror route. Like in the mirror, you can see the price between the gold and the interest rate. So if we increase the interest rate, there is a fundamental impact and a fundamental explanation that gold price can fall. But I want to tell you one more thing that we must be careful about if this happens. If the stock market starts to go down, more people will not invest in stocks anymore, and maybe at that moment, people will begin to invest in precious metals like gold and silver, which can make gold bullish.
And very often, after this massive downtrend of gold in some moment, if the stock market crashes, we can see the gold pricing crave, so we need to be careful because if something changes, it’s not simply on the market; everything sometimes things can be complicated we can see the different price and gold we can see the market wants to see a weaker dollar, et cetera, et cetera. So I want to tell you we need to be careful. Please watch when you invest money anywhere. This is not an investment challenge; just talking about fundamental technical analysis. When investing, you must be careful; you must think there’s always a second story, the second side of the coin.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
