As we mentioned last week, gold has formed a head and shoulders pattern on the daily chart with neckline support around 1281-1284. We suggested to wait for a clear break down under that neckline to get into a sell position on retest of the neckline after breaking down. That strategy was a safe choice because price might just hold support and bounce back. Indeed price did test neckline support at 1281-1284 and then rebounded to over 1300. So there was no breaking down yet. And we did not get a chance to enter our signal as planned. We also did not get trapped into selling at low price so that was a good strategy. Even though after testing support price went back to 1300, we still think the head and shoulders pattern on the daily chart is still valid as long as price remains under 1325. Therefore, we does not exclude the possibility that this bounce is just a mini correction, and price will go down to test the neckline again and ultimately break under it.
Now price has reached 1306-1307, which we think it can be a potential reversal point. On the 1-hour chart, 1306-1307 is 1.618 Fibonacci Extension level. Plus the recent up swing from 1281 looks like a mini bear flag pattern. If price breaks down under the support trend line of the channel, it can go down south to test support at 1284 again. The MACD and RSI indicators on the 1-hour chart are having bearish divergences. These divergences indicate that up swing momentum has weakened as price has been going up.
Our plan is to watch the price action at 1306-1308. If it forms any kind of reversal signal, we might enter the sell short. A safer choice otherwise is to wait for a break down under the support trend line of the up swing channel to get into the short position. Our target will be around 1284. However if price breaks above the resistance at 1306-1308 without any reversal signal, the up swing may continue to 1315. So we keep watching the market and wait for confirmation.
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