Gold (XAU/USD) – Assessing a Buy on the Dip Strategy

Gold (XAU/USD) - Assessing a Buy on the Dip Strategy

Consolidation Mode in 2014:
When assessing Gold (XAU/USD) from a technical perspective, we should first consider the overall trend in 2014. The lack of a directional trend is evidenced by the clustering of the 200-, 100-, and 50-day simple moving averages (SMAs). We also see that the price range for the year was essentially set in Q1, with a low on Dec. 30 around 1183 and a high in March around 1388. Price has since “coiled” or traded in a triangle.

Gold (XAU/USD) Daily Chart 8/12
gold 8/12 daily chart

(click to enlarge)

Bullish Bias since June:
Now, if we look at price action since June, we see that there is a bullish attempt that has been intact. Why?
1) Price broke above the moving average cluster and has held above them after the latest upswing last week.
2) The RSI has held above 40 after tagging above 70, a sign that the bullish momentum is maintained.

Therefore, the current mode can be described as neutral-bullish. With that in mind, we can have a bullish expectation in the short-term at least toward to the triangle resistance, which could be around 1330 if gold (xau/usd) rallies this week.

Now let’s turn our attention to the 4H chart, and assess a trade plan for this bullish outlook.

Gold (XAU/USD) 4H Chart 8/12
gold (xau/usd) 4h chart 8/12

(click to enlarge)

Assessing a Trade Plan:
Gold started the week retreating further from the 1322.70 high last week. This decline could provide a buy-on-the-dip set up. There appears to be support around 1300, but the bullish outlook would look invalid if price dips below 1290 and the rising trendline from last week.

Entry, Stop-loss, Target: Now we can establish 3 things. Entry could be planned around 1300. A Stop-loss can be placed at 1285. There could be two targets, a conservative and aggressive. The conservative would be the 1320 level, respecting last week’s high, while the aggressive one would be a tad higher, at 1330 and the triangle resistance seen in the daily chart.

Reward to Risk: This trade set up provides a potential reward of 20 (1320-1300), and 30 (1330-1300) units. The potential risk at stop-loss would be 15 units (1305-1285). You can see that this trade has a barely acceptable reward to risk. Therefore, waiting for the current dip to extend toward 1300 if you care about reward to risk, especially if you are not completely sold on a short-term bullish outlook for gold.

Final worlds:
If we are bullish on gold but miss a trade because of poor reward to risk, we should probably wait to see if price can break above the triangle in the daily chart to expose better targets and set up trades with better reward to risk profiles.

For now, remember we need hedge limit the bullish outlook against the consolidation mode we have seen in 2014, but we can have a slight bullish bias based on price action since June.

Now, if there is a break below 1285, then we should look at the triangle support, probably around 1270, as a last line of defense against the market turning from neutral to neutral-bearish in the medium-term.

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