In our last market analysis, we expected an upside bounce from support at 1267. Gold has reacted exactly like we expected. It traded as high as 1282 yesterday. We also sent you a gold alert yesterday saying that if gold does not manage to close above 1281-1284, it can turn down hard to lower prices than last support at 1267. However in today’s analysis, we would like to point out two different scenarios for gold in the coming days or weeks.
On the above daily gold chart, we point out the first scenario for gold. As you have followed us, we talked about the head & shoulders (H&S) pattern on the daily chart a couple of weeks ago. We said a breakdown under the neckline could lead gold to lower prices such as 1270 or even lower. And we said price would re-test the neckline. Market has proved what we predicted is totally accurate. After breaking down under the neckline, price slumped to 1267-1270. Now gold price bounces up to re-test the neckline at 1281-1284. This neckline once was a strong major support, now becomes a major resistance. If gold does not break this resistance, it will go south from here. That is a typical example of a trading method for H&S pattern from any technical analysis textbook. However, we will have to prepare for a different scenario rather than just rely on theoretical textbook. Trading is about looking at different scenarios that could happen, and preparing for different outcomes.
So the first scenario here that we want to talk about is what if the price breaks the resistance at the neckline ? As illustrated on the chart, a breakout is confirmed when a daily candle closes above the neckline. It could mean our H&S pattern has failed to bring gold down further than 1267. There will be quite a lot of stop losses for sell orders trigger, and price will likely continue to the upside. If that is the case, we will see price reach resistance at the downtrend line, around 1295-1300 very fast. That downtrend line has been acted as strong resistances for gold since the fall from the top at 1346. Things can get worse if we see a candle that breaks through that downtrend line. That could mean the bearish short term trend is over. The sentiment will change quickly to bullish and gold would challenge the top at 1346-1350 or even more.
We want to warn you about the possible breakout above the neckline and the failure of the H&S pattern first because we think it is very important for you to protect your margin in case market goes to the opposite of what we want, before thinking about making profit. It is just risk management. So the second scenario that we want to point out here is a typical example of trading method for H&S pattern. After breaking down, price goes up to re-test the neckline at 1281-1284. However if gold does not close above the neckline, it will turn down hard from the neckline. Confirmation for failures of a breakout over the neckline is red daily candles following through after the successful re-test of the neckline. If that is the case, we can be happy to go short on gold.
We have pointed out two scenarios for you to consider. Sure we can take a risk here by adding a short position at the neckline. But if we see a daily candle closes above the neckline, we will stop our sell order and look for other opportunities. If you trade on intraday chart, a stop-loss order above 1288 is appropriate.
Today is the last trading day of this week. The weekly close is important to watch for. As illustrated on the above weekly chart, if price maintains to close around 1280-1283, the weekly candle is a green candle and in form of a hammer. A hammer candlestick pattern is a sign of trend reversal, from bears to bulls. When a hammer appears at the trend line like this, it is even a stronger signal of a trend reversal than usual. It can tell us that maybe the bears have weakened and failed to bring prices down any further. That the bulls start to take over market sentiment, and price will likely go up. Of course, hammer candlestick pattern needs a confirmation, which is another green candle that appears next. So if this weekly candle appears in a form of a hammer, we will watch next week’s close as confirmation.
We also illustrated different weekly bullish grabbers and bearish grabbers on the above chart. Bearish grabbers often appear at the top while bullish grabbers often appear at the bottom. We see three other bullish grabbers on the uptrend line, and now this week starts to look like another bullish grabber but not yet confirmed. So if this week maintains to close in green, it can tell that we have another weekly bullish grabber here. That’s why we want to bring this out to you because we think this weekly close can say a lot of things. Either it will be a hammer or a bullish grabber, it would tell us that trend reversal can happen here. And we might be at bottom of the short-term downtrend.
In conclusion for this long analysis, we think gold market at the pivot point again. That means market can go to either directions, up or down, which depends on how it plays out today and next week. If today gold closes above the H&S neckline, that will signal a possible failure of H&S pattern and a bullish grabber or hammer pattern for weekly candle, meaning gold will go up at least to the downtrend line. And we will have to stop any sell orders and watch for further market action before committed to any trade. If the market turns down later today and closes under the neckline, we can still keep our short position and see what is going to happen next week.
For now we will keep watching reaction at the neckline 1281-1284 and waiting for the weekly close. Have a nice weekend !