If you took last Friday off work… perhaps for a long-weekend mini-vacation, or an appointment with your tax advisor… I sure hope you aren’t a gold trader.

If you missed it, gold is 9% lower than Friday’s open. On its lows, the two-day drop fully reached 11.3%.

And just as we suspected it would, the avalanche began right at $1,550.

Since mid-2011, gold prices have been forming a long-term descending triangle pattern. Seen at the top of a large increase in prices, this pattern provides a clear bearish forecast.

The descending triangle pattern requires two things – lower highs, showing the marginally decreasing strength of gold bulls, and a horizontal support line (in this case, $1,550).

Here’s the chart, with some annotations that I’ll explain below…

See larger image

As you can see above, gold could go as low as $1,150 to $1,200 per ounce just ahead.

So why have I targeted $1,200 as the downside price? Well, I used two methods. First, this level coincides with the 61.8% retracement of gold’s uptrend since 2009. And second, the descending triangle pattern itself provides a measuring tool.

After a breakout of the horizontal support level, prices typically fall the same distance as the “base” of the pattern, which I’ve highlighted for you with the green bar. Projecting an equidistant move down from $1,550, I see prices going as low as $1,150.

Momentum has clearly shifted to the gold bear camp. The question now becomes: what do you do?

After such a sudden and sharp selloff, most of the easy gains have been had. Short sellers should have had new position, sell stop orders parked at $1,550. Those who did are already sitting on about $12,000 in open profits (per futures contract).

If you didn’t get short at $1,550… it’s best to wait for a bounce before selling. And don’t go short now. If this two-day move is in fact overdone, we should see prices drift back up to near $1,500. This zone – $1,500 to $1,550 – once acted as support, but should now act as resistance.

I’m watching for a rounding top pattern in this range. A sharper, V-shaped recovery would lead me to be more cautious on gold shorts.

Either way, it seems gold bugs have capitulated and large long positions are either severely underwater or fully blown out by margin calls and/or stop loss orders.

Keep reading for recommendations on this front.

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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.