In just a couple of trading sessions, gold price fell from 1345.28 to 1292.20, or a 4% slide. This slide broke below a previous consolidation, and thus invalidated the bullish breakout from that consolidation.
You can argue that the pop up to 1345 was an exhaustion swing, and the market is now neutralized around 1300. You can also argue that the strong price action indicates that there is further downside risk. Of course, there is the third idea, that price is still bullish. I believe that the bullish scenario, even though possible, is not as probable as the neutral to bearish scenario. While price might not be bearish just because of 2 days of strong decline, there is downside risk in the short-term toward the the 1268.50 – 1275.50 a support/resistance pivot area.
Gold (XAU/USD) Daily Chart (7/16)
(click to enlarge)
With the neutral-bearish outlook, a sell on the pullback idea is probably most appropriate. It will somewhat hedge against the risk that the market is turning bullish. In the daily chart above we can see that price is stalling around the moving averages (200-, 100-, 50-). If price holds above them, traders will see a bullish signal, though it won’t be as strong as a case with the moving averages sloping up.
A rally could thus be simply a pullback, or it can be the start of a bullish continuation swing. If price comes back up to around 1320, we should get clues on which scenario gold is in.
– Impulse Wave: This week’s decline has an impulse structure based on Elliott Wave principles. The middle down-wave is the strongest, and the up-waves never overlapped with the up-wave above. Basically, this is a type of wave structure in a trending market, while choppy overlapping swings would reflect consolidation structure.
– Note that 1318.75 is 50% retracement of the downswing we had this week.
– 1320 is where the 100- and 50-period simple moving averages are in the 4H chart.
– Just above that, at 1325, we have the 61.8% retracement.
– A bearish market should respect these factors as resistance, so if price pops up above 1330 for example, we are likely not neutral to bearish, but neutral to bullish.
Reward to Risk:
– Also, traders selling at 1320 for example with a stop above this month’s high of 1345, let’s say at 1355, will risk 35 points. A target of 1270, between the support levels noted above, would offer a reward of 50 points.
– This is by no means a great reward to risk ratio. This is usually the case when trading within a consolidation period, which is what gold is in so far in 2014, as evidenced by the moving averages in the daily chart clustered all together.
Traders can lower the risk by considering a stop around 1335, clearing some of the common highs, but not clearing the 1345 high on the month. Its a trade-off between risk, and elbow space for a trade to work. I can’t tell you what to do, but I hope the technical conditions are clear, and you have enough information to make a forecast or plan a trade.
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