Gold (XAU/USD) has been trading in a falling wedge after making a high in July at 1345. This week, this consolidation pattern was broken, and we now have a bullish outlook on gold. We also see:
1) The RSI tag 70, which shows bullish momentum, though in the near-term it might look overbought.
2) Price has pushed above a previous high at 1312.25. This official broke the pattern of lower highs and lower lows.
(click to enlarge)
After this breakout, let’s anticipate a pullback.
1) As mentioned before, the 4H chart is starting to look overbought based on the RSI reading going above 70.
2) There could be some end-of-week, profit-taking.
If there is indeed a pullback on the Friday (8/8) session, we should be ready for buyers in the 1295-1300 area. A bullish market should respect this area, which would mean finding support from the 50-period SMA, and a previous resistance area. We should also make sure that the 4H RSI holds above 40. If it approaches 40, stalls, then turns up, the bullish continuation swing may be starting.
Assessing a trade plan:
Target: Let’s take a look at a bullish trade profile that has upside towards the 1330 area, a conservative bullish outlook from the wedge breakout.
Entry and Stop-loss: If we get in around 1300, and put a stop at 1288 (giving it elbow space to 1290), then there is a 12 unit risk. We should be careful because if price falls sharply, we should not simply “catch a falling knife” but wait for at least some near-term support and price bottom to form.
Reward to Risk: The R:R will be 30:12, which is 2.5:1.
Looking at daily gold chart, we can understand why we should have a conservative bullish outlook. The market is sideways in 2014, and there is a falling triangle resistance that will meet price below the 1345 July-high.
(click to enlarge)
Even though the 2014 mode has been sideways, we should note that there are some bullish developments since June’s bullish swing from 1240 to July’s 1345 high.
1) The RSI has tagged above 70 and has held above 40, which is a sign that the bullish momentum is maintained.
2) Price, after pushing above the cluster of 200-, 100-, and 50-day SMAs, is now respect them as support. This is a “slingshot” signal for the bullish outlook.
With the market in a neutral-bullish mode in the daily chart, and a bullish breakout in the 4H chart, we should indeed look for buyers if gold (xau/usd) dips toward 1295.
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