Gold Signals Bullish Continuation with a Flag Breakout

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Gold Signals Bullish Continuation with a Flag Breakout

Gold has been bullish in October, though it should be noted that this rally still within the context of a bearish trend since July’s high around 1345.

Gold (XAU/USD) 1H Chart 10/21
gold 10/21 1h chart

(click to enlarge)

The 1H chart shows a bullish market:
1) The 200-, 100-, and 50-hour simple moving averages (SMAs) are sloping up and are in bullish alignment.
2) Price is trading above the SMAs.
3) The RSI has tagged 70 and then held mostly above 40 showing maintenance of the bullish momentum.
4) To start the week, gold broke above a flag pattern, signaling bullish continuation.

The breakout so far has stalled under last week’s high near 1249 ahead of the Chinese GDP data.
China GDP q/y (Q3): 7.3%
Forecast: 7.2%
Previous 7.5%
china gdp 2014 q3

(click to enlarge; source: forexfactory.com)

Growth continues to slow in China and this pressures risk sentiment, which should help (XAU/USD). However, the data was likely priced in, and the actual print wasn’t as bad as some had forecast. Still, the fundamentals of a recession looming in the Eurozone and growth on a downturn in China, gold should have some resilience at least in the short-term.

Mute Reaction; Bearish Outlook: The reaction to the data point was mute, but it showed that the bulls ran out of gas today and did not get a recharge. We can expect some near-term bearish correction, but October’s bullish trend is still intact unless there is a break below 1230. That would complete a double top and break below the hourly SMAs.

However, a bullish market should find support in the 1237-1240 area. If that is the case, the pressure should remain on the 1249 high. Now, a break above 1250 extends October’s bullish correction towards the next key resistance area.

Gold (XAU/USD) Daily Chart 10/21
gold daily chart 10/21

(click to enlarge)

Resistance Factors: The next key resistance will be in the 1270-1280 area, which is a previous support/resistance area, and likely where the falling trendline from 1345 will challenge the rally. While we should stay cautious of the prevailing downtrend, the short-term bullish outlook is strengthened by a recent bullish engulfing pattern from last week.

A break below 1230 however would invalidate the bullish engulfing signal and would suggest a bearish continuation.

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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.