Gold (XAU/USD) – Trading the Falling Wedge Pattern


Gold has been bearish since tagging 1345 earlier in July, and the moving averages and RSI show it.
1) RSI tagged 30, and has held below 60.
2) 200-, 100-, 50-period moving averages are in bearish alignment, and price is trading below it.

Gold (XAU/USD) 4H Chart 7/31
gold 4h chart 7/31

(click to enlarge)

Falling Wedge:
Although price action and momentum has turned bearish in the 4H chart, the price structure suggests a pending bullish outlook, especially since price was bullish before retreating from 1345 into a falling wedge.

After the FOMC statement, the USD stalled across the board, but you wound’t be able to tell from the gold chart as XAU/USD actually moved below 1300 after the fundamental risk event.

What are some ways we can trade this wedge pattern?

1) Wait for key support near 1270: There is still downside risk in gold before the next set of key support factors. When you look at the daily chart, there is a support/resistance area around 1275. As price approaches 1270, it will also get close to a rising trendline.A break below 1260 would probably clear the rising trendline. A bullish outlook after a break down of the trendline might need to be limited for consideration of a possible bearish outlook back toward the 1240, then 1200 handle.

Gold (XAU/USD) Daily Chart 7/31
gold daily chart 7/31

(click to enlarge)

Reward to Risk:
Let’s say entry is 1275, and the stop is at 1255. That is a 20-unit risk. If the bullish outlook is limited to the falling triangle resistance, we should probably limit it to 1325. This is a 50-unit reward, and the Reward to risk here is 5:2, or 2.5:1

2) Bullish breakout: 
Price might not reach the 1270 area. Then if gold pops up above 1310, the bearish outlook should be shelved. At that point price would be back above the moving averages and would have broken the falling wedge. We can then expect price to hold above 1300 in a bullish attempt toward the triangle resistance seen in the daily chart, or toward the 1320-1330 area.

Reward to Risk:
After the breakout we can wait for a pullback to buy around 1305. If the stop is at 1290, we have a 15-unit risk. An initial target is 1325, the potential reward is 20 units. This is a 20:15 or about a 1.25:1 reward to risk ratio. This looks terrible. But, this second scenario has a stronger bullish implication because it would have avoided the triangle support, and held above the moving average cluster in the daily chart. Thus, a 1345 target is viable. This gives you a 40:15 or 2.6:1 reward to risk.

NFP: The next key event risk for the rest of the week will be Friday’s US Non-Farm Payroll report. After a strong 288K print for June, the July reading is expected to be around 230K. The ADP jobs report yesterday suggested the jobs market indeed leveled off a bit after the strong June reading. 230K would still be a decent reading, but we will probably need a better-than-expected reading such as 250K above to give the USD another push. Otherwise, if the data is in-line or worse than expected, we should look for USD-consolidation, which means bearish in the short-term.

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