Gold rally green light?

June 23, 2014 11:17 AM

Gold exploded higher last Thursday on the back of a relatively dovish statement from the Federal Reserve, but prices stalled out at $1,320 on Friday. After another quiet day today, the yellow metal is working on its second consecutive inside candle on the daily chart (not shown), indicating indecision and balanced, two-way trade in the short term. While this week’s upcoming economic data will undoubtedly effect gold, major technical considerations may be the most important factor to watch.

Looking at a 4-hour chart, we can see that the gold rally is pressing against a major bearish trend line off the September 2012 high. The big surge, followed by a tight consolidation near the highs, creates a clear Bullish Flag pattern on the chart. If this pattern is confirmed by a break above the top of the flag and bearish trend line, it suggests a strong continuation toward at least the 61.8% Fibonacci retracement of the Q2 pullback at 1334. The recent consolidation has also alleviated the overbought condition in the 4-hour RSI indicator, perhaps a sign that the bulls are simply catching their breath before taking the pair on another run higher. 

Of course, a bullish flag pattern must be confirmed before giving buyers a green light, and with the multi-year trend line reinforcing resistance in the 1320 area, a reversal back to the downside is also a legitimate possibility. If we do see gold turn lower, profit-taking by gold bulls may drive prices back down to at least the 38.2% retracement of last week’s rally around 1300, if not the 61.8% retracement around 1280.

 

 

Depending on how the current pattern breaks, we should have a lot more clarity and a strong near-term bias on gold by the middle of this week.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.