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.