In our last analysis, we spotted a possible “inverse head & shoulders pattern” on the 1-hour chart but we also emphasized that if gold trades below 1271, the pattern will fail. Well, it failed eventually when gold traded below 1271. The pattern was not confirmed yet so we used the word “possible” here. And we prefer if it worked, we would sell on rally instead of buying low. But even if you took some risk to buy gold at 1273-1274 for the counter trade, the loss you may suffer would be very small because the stop loss was at 1271. That would be just 20-30 pips totally. Otherwise if you choose to wait for the confirmed break out which did not happen, you have nothing to loose but an opportunity to add some short positions on rally.
Gold fell to 1266-1267 yesterday. And it reached our support as we have expected for the last two weeks. Our prediction has been very accurate so far. We mentioned clearly in a few recent analysis that we expected some kind of support at this price 1267. After touching 1267, gold found some buyers there and bounced up to 1272. So now, what’s the next direction of gold ?
Take a look at the above daily chart. We have identified three important support areas that gold might encounter this week or next couple of weeks. The first support area is at 1263-1267, right at the uptrend line as we mentioned in our yesterday’s analysis. We are going to watch this support area very closely in the next couple of days. This support is very important as it is the trend line support of the rally from August 2018 until now. If this support is broken, the whole uptrend for the last 6 months will be in danger. That could signal the medium-term trend may change its status from bullish to bearish. And if it does, we will not see gold at 1300 or more for at least a couple of months. Therefore, we believe you will see gold bulls start to fight back to stop the fall through. If gold bulls are strong enough to hold support at 1267, we can see gold start moving up to the resistance at the downtrend line.
However if support at 1263-1267 can’t hold, the next support is at 1250-1254. This second support is very important as well because it is where the 200-day moving average lies at. And it represents the 61.8% Fibonacci retracement of the move from 1196 to 1346. Gold usually would retrace 61.8% percent and then continue its main trend, which is uptrend here when we talk about the trend from 1196 to 1346.
If the second support at 1250-1254 can’t hold, our third support is at 1238-1243. This third support is also the 1.618 Fibonacci extension. It might be the last support for medium-term bulls before gold would fall to 1200 or lower. Many expects gold would reach this destination but we will have to see if bears are strong enough to take gold lower than 1st support or 2nd support.
The above weekly gold chart shows that bears are in fully control of the short term. That being said the short term trend is currently down and might continue for some time. The shooting star candle appeared at the top signaled the weekly reversal. Then the bearish engulfing candle appeared 4 weeks later hinted that bears in fully control of the market. Finally, the rejection candle stopped any bulls effort to take gold above 1300. Now gold stands at the very important uptrend line but it looks like this uptrend line might not be able to hold gold for long. The break through can happen in a couple of weeks or so.
We are going to watch the support at 1263-1267 for the rest of the week. We expect some kind of upside retracement from this support. Gold can possibly bounce up to the resistance at the downtrend line. However when analyzing the weekly chart, we can see bears are in fully control at the moment. So we do expect that support 1263-1267 will be tested again. And eventually gold will break down under it to test 2nd or 3rd support. If we see any kind of reversal sign at the uptrend line, we might enter a long trade. But for now, our preferable strategy is still a sell on rally instead.