Gold – Bullish Divergence and Engulfing Candle

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Gold - Bullish Divergence and Engulfing Candle

Gold has likely turned the corner back towards the bearish trend started since the record high near 1920 made in 2011. In the most recent string of events, gold has reached a low of 1130 in Nov. 2014 before going into a multi-month consolidation, bullish correction.

Gold (XAU/USD) Daily Chart 3/11
gold daily chart 3/11
(click to enlarge)

Correction Over:This bullish correction brought gold back to 1307 before it started to retreat again. The market became tentative, asking whether the downtrend has returned, of if the bullish correction will continue after a pullback in February. We can see the uncertainty in the daily chart when it was dancing between 1190 and 1220.

Reaction Results in Bearish Breakout: After last week’s US jobs report on Friday, the market seems to have figured out its direction. It is highly likely now that the market intends to test the 1130 low, with risk of breaking lower in extension to a 3.5-year, secular downtrend.

I made some of the above assessment by reading the candlesticks themselves. Now, let’s go to the 4H chart and see what the candlesticks are telling us.

Gold (XAU/USD) 4H Chart 3/11
gold 4h chart 3/11
(click to enlarge)

The technical picture in the 4H chart is bearish, based on price action, moving averages and the RSI.

Reversal Signals? However, during the 3/10 session, we saw a bullish engulfing candle as the RSI forms a bullish divergence. These can be signs of the market going into a period of consolidation or bullish correction. Now, we are seeing some tentative candlesticks through late 3/10 session and beginning 3/11 session.

Resistance: I think if gold can hold above 1160, traders might pull it back towards the 1190 area. If it does approach this previous support, we should anticipate sellers, especially if the 4H RSI pushes to 60.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.