Gold (XAU/USD) – Should We Fade this Rally?

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Gold (XAU/USD) - Should We Fade this Rally?

YES.

During the 7/17 session, Gold price rallied sharply, accelerating a pullback that started earlier in the week from about 1292.20. Today’s rapid rise in gold price can be attributed to a few factors:

Factors for the Pullback:

1) Technically, the market was already in a pullback, so today’s price action can be seen as a continuation of the intra-session momentum.

2) A Boeing passenger airplane from Malaysian Airlines was shot down in Ukraine, apparently from an anti-aircraft missile from the ground, by rebels who favor Russian governance or independence from Ukraine. We are learning that these skies have seen transport planes shot down during this past week, so this could be simply the doing of a trigger-happy, poorly trained rebel force. To me, its amateur hour on both the rebels for their mistake and the airline for flying into a war zone.

3) On top of this tragedy, we also heard that Israeli forces are conducting a ground strike into Gaza. The Israeli government reported that this attack is focused on a tunnel that Hamas has been building, which leads into Israel and would expose the country to an attack on its soldiers and civilian. As expected Hamas issued a threat of retaliation, and they mean it. In this day and age, this is not a shock at all, but just another leaf in the book of a never-lasting conflict.

Gold price popped up on the Malaysian airplane incident. But I think we should be getting ready to sell. I explained some of the details in the previous gold article: Gold (XAU/USD) – Where Will the Sellers be on a Pullback?

Gold (XAU/USD) 4H Chart 7/18
gold 7/18/2014(click to enlarge)

Today, let’s follow up whether we should still expect resistance in the 1320-1330 area.

1) First of all, you are indeed seeing resistance around 1320-1325.
2) The RSI in the 4H chart is back to 60. If the you believe that the previous swing from 1345.28-1292.20 opens up further downside, then you should look for the 4H RSI to stall at 60 and turn down again.
3) The rally was sharp today and the strength of the bullish candle in the US session can be a concern for traders looking to short gold. However, if price can consolidate around 1320 long enough, we can wait for a bearish breakout to signal the bearish outlook in the short-term.

Gold (XAU/USD) Daily Chart 7/18
gold daily chart 7/18
(click to enlarge)

When you look at the daily chart, you see a flat and choppy market. A drop towards the 1268-1276 area would be within this neutral or consolidation mode in 2014. It will even stay above a projected rising trendline from the low on the year around 1183. This means a bearish outlook in the short-term is valid even if the market is turning bullish in the medium-term (looking at rest of the year).

However, with the moving averages around 1290-1300 in a non-slopping manner, we should expect price to revert back toward these levels when the daily RSI is above 70, or below 30.

Final Words: Basically, the expectation of resistance in the 1320-1330 area is still valid. The Malaysian Airline tragedy is a risk-off event, but I don’t believe it is significant to the financial markets. Ukraine was already in a warzone. We actually still have another Malaysian airplane still not found since March. The Israel-Palestine conflict has been in existence for quite a while, and today’s strike is not unique in scale or significance even if it is so in execution. Not to be callous, but these incidents should not matter outside of the short-term FOR GOLD price. I can be wrong of course, and a break above 1335 will make me reconsider the situation.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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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.