Gold Price Action Setup: Deciphering the Trend

Gold, XAU/USD – Technical Outlook:

• Gold’s recent retreat appears to be consolidation within the broader uptrend.
• However, the yellow metal is bearish on smaller timeframes.
• What are the key levels to watch?

This is a follow-up to the previous update “Gold and Silver Technical Outlook: Have Precious Metals Turned Bearish?”, published Feb.13. This piece attempts to address the question by looking at less-subjective ways to identify the trend on the daily charts.

On the daily charts, the color-coded charts based on trending/momentum indicators suggest that XAU/USD is currently in a consolidation phase (not yet bearish) within a bullish phase. To some extent, this is evident from price action as well.

XAU/USD Daily Chart

Chart created by Manish Jaradi using Metastock

The retracement so far this month is 38.2% of the rise from November – retracements of 38.2%-50% are considered to be reasonable, and not necessarily the end of the prevailing trend. Secondly, gold remains above the lower edge of the Ichimoku cloud support, the 200-day moving average, and the resistance-turned-support on the 89-day moving average. Moreover, XAU/USD hasn’t broken below any noticeable price pivot.

XAU/USD 240-minute Chart

Chart created by Manish Jaradi using Metastock

The tricky bit here is that there is no significant price pivot on the daily charts above the August high of 1808 due to the sharp/unidirectional rise in January. The absence of a price pivot makes it tricky to decipher a change in trend, especially in the case of ‘inverted-V’ or ‘A’-shaped declines. That is, the confirmation of a change in trend can come later than instances where there is a price pivot closer to the peak.

XAU/USD Daily Chart

Chart created by Manish Jaradi using Metastock

In this regard, bears would argue that gold has turned bearish in the short term based on an Average True Range-based trending indicator (see chart), which the color-coded intraday charts confirm. On the 240-minute charts, the trend is bearish.

XAU/USD Daily Chart

Chart Created Using TradingView

Depending on the timeframe of reference, the assessment differs. XAU/USD is now approaching a strong support area of 1775-1810. A positive Stochastics divergence on the daily charts suggests the slide is losing steam and the yellow metal could be due for a rebound (see daily chart). However, gold would need to break above the immediate ceiling at 1890-1900 for the immediate downward risks to ease.

— Written by Manish Jaradi, Strategist for DailyFX.com