Where Will the Market Short Gold Again?

Where Will the Market Short Gold Again?

Gold has been in a bullish correction since November. Let’s take a look at its daily and weekly charts to assess the technical developments, the key levels, and where the market might short gold again.

Gold (XAU/USD) Daily Chart 1/20
gold daily chart 1/20
(click to enlarge)

Bullish Breakout: Gold has rebounded from about 1130 to about 1280 since November. This rally has broken above a falling trendline since July, and above the 200-, 100-, and 50-day simple moving averages (SMAs). The daily RSI has tagged 70, which reflects bullish momentum in the medium-term, but also suggests the momentum is a bit overheated. However, just because the RSI is above 70, it does not mean the price action will reverse. A better signal that momentum is slowing would be a bearish divergence where price makes another high but the RSI makes a lower high.

Look for Bearish Divergence: Now, with momentum seems overbought AND price is at a key resistance, the market would have more impetus to short gold. When we look at the weekly chart we can see that price is indeed approaching a key resistance just above 1300.

Gold (XAU/USD) Weekly Chart 
gold weekly chart 1/20
(click to enlarge)

Key Resistance: The 100-week SMA is just above 1300, and the weekly RSI is approaching 60. A combination of the weekly RSI being at 60, and the daily RSI showing bearish divergence around 70, would be another signal that a bearish attempt is just ahead. We might want to see at least 1 bearish week off of the resistance area before considering the bearish outlook. For the bearish scenario, It would also be nice to see price able to break below 1275, and therefore back below the 50-week SMA, and the 200-day SMA (the same thing).

Conservative Target: If price indeed starts to retreat, we should first limit the bearish outlook to the 1200 psychological level, which is also around the common lows in 2013 and Q1-Q3 of 2014.

A more aggressive target would be the 1130-1150 lows of 2014, with risk of breaking towards the 1100 level, especially if the FOMC raises rates as planned, by mid-2015.

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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.