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(Kitco News) - Mon July 30—Comex December gold futures are pressing lower in early New York trading action Monday. The failure to punch above Friday's high begs the question—are the recent gains a bull trap?

Short-term traders may want to use caution near term as this question is resolved. Action since late May on the daily chart has unfolded in a classic "triangle" pattern, seen on Figure 1 below. A triangle is comprised of four points, which have developed, seen at 1, 2, 3 and 4 on the chart. When a market is in a downtrend (which it was) point 1 is at the bottom of the triangle. The four points allow traders to draw an upper and lower trendline.

Generally—but not always—triangles are continuation patterns, which means they represent a pause in the previous trend before that trend continues. Sometimes, they are reversal patterns—which is what could be happening here. When they are reversal patterns they tend to be large and over a multi-week period, which has occurred here.

How are triangles confirmed? Generally, they are confirmed with two consecutive settlements above or below a trendline. On rare occasions, however, it is a trap. Monday's action suggests the recent punch above the top triangle trendline could indeed be a "bull trap." That is a phenomenon in technical trading in which a pattern or breakout looks bullish to entice traders to jump in on the long side, but then "traps" the new longs with a failure and reversal.

The key level for short-term traders to watch is that top trendline at about $1,617 per ounce. If the gold market plunges and closes under that trendline, odds are this is a trap. Or, it could be that the bulls and bears are battling it out and the contract has dipped back down to "test" that trendline.

No matter, short-term action will be key. If the trendline can hold for another day or two, the bullish triangle would be confirmed.

Price patterns are nice because they offer technical traders actual targets or objectives. To calculate that for a triangle simply measure the distance between the widest area of that triangle and then add that on to the breakout point. I rounded off a bit but the width is about $100 an ounce. Add that to the breakout point at $1,618 per ounce and technical traders can find an upside objective at $1,718 per ounce.

But, the trendline must hold. If it fails, the bears will most likely swoop in and drive the market back down for a test of the lower trendline. It's just the nature of the markets. If one thing doesn't work, try the other. And, that would leave gold back where it started—mired in a multi-month sideways range.

Eventually, gold will break out of its sideways range. All markets do. Whether it is tomorrow, several weeks or several months from now it will break out—either up or down. Savvy traders know the longer a market coils in a sideways, neutral range, the more power it is building up for a breakout. It's like a spring all coiled up. When it does pop out of the box, it jumps high. Traders need to be ready for the breakout whenever it arrives.

By Kira Brecht, contributing to Kitco News. Brecht is managing editor at www.TraderPlanet.com.

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