Monday's $30+ drop in the gold price not only caused a deluge of selling in gold mining shares, but it also triggered a breakdown from a classical technical chart pattern called a head & shoulders top:

While it seemed quite ominous on Monday after this H&S top pattern was "completed",  gold has a magical way of doing the unexpected. Less than 24 hours after the "neckline" of the H&S pattern was snapped, gold came roaring back after a much weaker than expected ISM Manufacturing Index reading (the lowest since June 2009). 

Gold (Daily)

Depending upon where one draws the neckline for this pattern (some might use $1500 and others might use $1496 or $1492) the downside objective would be somewhere around the $1420 area. However, what's worth noting is that only about 50% of H&S tops actually reach their downside measured move objectives. The other 50% of H&S patterns either get a little bit into the money (below the neckline) before turning back up, OR they immediately reverse back to the upside. 

Simply put, a H&S top is not a high percentage chart pattern and we are increasingly seeing this chart pattern lead to failed moves in the current algo-driven market environment. It seems that most algorithmic trading is motivated by hitting the largest number of stop loss triggers, both on the downside and the upside, and this leads to an increasingly large percentage of 'failed' moves (chart patterns that do not meet their objectives and instead result in reversals). The algos did well this week in gold considering the $60 trading range for the week and the number of key support and resistance levels that were tagged. 

Heading into next week gold bulls should feel pretty good considering that the $1500 support level has held yet again on a weekly closing basis. Moreover, the bears had their chance with a pretty good setup early in the week as Peter L. Brandt pointed out on Twitter (bearish CoT positioning + a chart pattern top), but they weren't able to sustain the momentum. I think gold still needs some more time to consolidate its big gains since May, however, dips are likely to continue to find strong bid support before an eventual upside breakout (above $1567) later in the year (December). 

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