Gold – Trading the Bearish Continuation

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Gold - Trading the Bearish Continuation

Gold is starting the week at a 10-year low after breaking the 2013-2014 lows around 1180, signaling bearish continuation (refer to the weekly chart below to see the prevailing downtrend since 2011.) This can be attributed to general USD-strength on the back of the FOMC announcing the end to QE last week. We also have a broad commodity price decline that has been apparent for much of the second half of the year so far.

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

Bearish and Oversold: Looking at the 4H chart, we see a bearish market but one that is oversold as the 4H RSI dips to almost 10. (A reading below 30 is considered oversold, especially in a sideways market). But this is a bearish market, so a reading of below 20 might be needed to reflect oversold condition, and it can remain oversold without much consolidation in price, which would result in a run-away bearish market.

A run-away market is difficult to plan a trade for, but there is also the possibility of a bullish correction.

Pullback Scenario: Let’s say we can a break back above 1180 this week. Then we might expect some bullish correction, but this outlook should be limited to the short-term, within a session or two.

If price rallies back to 1200, we should expect some sellers. Looking at the 4H chart, we can see that there are resistance factors up to 1230 area, involving a falling speedline, and the cluster of 200-, 100-, and 50-period SMAs in the 4H chart.

Timing: Watching the 4H chart, we should anticipate the bullish correction to start turning when the RSI gets into the 50-60 area. If price stalls around 1200, and the RSI also stops just below 60, the timing would be ideal for a bearish continuation attempt.

Reward to Risk Assessment: Let’s say we have an entry around 1195. If we place our stop above 1230, ie, 1240, we have 45 units of risk at stop-loss. What is our potential reward? Well, if price does remain bearish, the weekly chart below shows that the next support pivot is around 1085. Let’s just say its 1100. If that is the case we have about 95 units of potential reward.

The reward to risk ratio for this trade is thus 95:45, which is slightly above 2:1.

Gold Weekly Chart 11/3
gold weekly chart 11/3
(click to enlarge)

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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.