Technical Analysis: How Low Can Gold Go On A Correction

Technical analysis of the gold price gives an indication of how low the price could fall, yet still remain within its bull trend after its recent excessive sharp increase.

Gold is in the second phase of a Bump-and-Run Reversal Top pattern, which typically occurs when excessive speculation drives prices up steeply, and is now at a critical juncture where substantially lower prices could be realized. Let me explain.

According to Thomas Bulkowski, the Bump-and-Run Reversal Top pattern (read here for details) consists of three main phases:

1. A lead-in phase in which a lead-in trend line connecting the lows has a slope angle of about 30 degrees. Prices move in an orderly manner and the range of price oscillation defines the lead-in height between the lead-in trend line and the warning line which is parallel to the lead-in trend line.
2. A bump phase where, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with fast rising prices following a sharp trend line slope with 45 degrees or more until prices reach a bump height with at least twice the lead-in height. Once the second parallel line gets crossed over, it serves as a sell line.
3. A run phase in which prices break support from the lead-in trend line in a downhill run.

As the chart above shows the price of gold has breached the sell line at $1,830 so we can expect to see a correction with downside price targets for support as follows:

1. $1,750 for support from the dotted pink line.
2. $1,650 for support from the warning line.
3. $1,500 for support from the lead-in trend line.