Bullish Shift: If we only look at October, we can say that gold is turning bullish, rebounding from about 1182.80 to almost 1250. Price has been making persistently higher highs and higher lows. It has broken above the 200-, 100-, and 50-period simple moving averages (SMAs) in the 4H chart. The RSI has broken above 60, which reflects a loss of the prevailing bearish momentum.
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Flag Pattern: Since last week, gold has been consolidating below 1249, and has formed what could be a flag pattern. A breaks above 1240, which would break above the flag pattern, would signal bullish continuation in the short-term, first toward the 1249-1250 area.
Bullish Correction: Now, this bullish continuation scenario in the 4H chart is a bullish correction scenario in the daily chart, where we have seen a decline from 1345.80 in July to 1183 in October. If price extends beyond 1250, the next resistance is likely in the 1270-1280 area, which represents a common support area going back to April and was resistance at the end of August, as seen in the daily chart. On the daily chart, we can also see that price will likely meet a falling trendline if it makes it to 1270..
Bearish Scenario: Now, let’s say price instead falls below 1230. In the 4H chart, we would see price below October’s rising trendline, and back into the cluster of 4H SMAs. Now, a break below 1220, would clear these SMAs, and give price action a lower low of significance for the first time in October.
(click to enlarge)
Flag Pattern and Bearish Continuation: When we look at the daily chart, this dip below 1220 would be a clear break below a flag pattern, which represents October’s price action. That will expose the 1183 low again, with a good chance of breaking due to 1)the prevailing downtrend, 2)general weakness of commodity prices, 3)general strength of the USD, and 4)the fact that silver – which has been setting up 2-year consolidation like gold – has already broken below its 2013-2014 lows. That 1180-1183 area represents the 2013-2014 lows for gold.
If the 4H flag pattern goes, we could still be developing the larger flag pattern seen in the daily chart. But if price falls below 1220 and clears the bigger flag pattern, the 4H flag pattern is not likely applicable.
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