Article / 01 July 2016 at 13:00 GMT

Gold in an uptrend, but beware bearish breakout

Technical Analyst / Saxo Bank
  • Gold price seems to be forming rising wedge-like pattern on the chart
  • Keep an eye on trend lines drawn on RSI for  direction of the trend
  • Breakouts are bearish about 70% of the time 
  • A bearish breakout could see the price drop to pattern low around $1,045/oz
  • Support levels for XAUUSD are at $1,200 and $1,100/oz
  • Gold's short-term uptrend looks solid as long as it keeps above $1,300/oz. 
  • Bullish breakout could target the $1,400-1,430/oz level

Gold's uptrend looks solid above $1,300/oz in the near term, but watch out for 
a potentially bearish breakout. Photo: iStock

By Kim Cramer Larsson

Gold bounced off lows in the fourth quarter of last year and entered an uptrend in the first quarter of 2016 when it took out the October 2015 peak. During the past few weeks it has tested the 200 weekly moving average and broke above that level last week on back of the stampede into safe-haven assets unleashed by the Brexit referendum.

In the short term, gold's uptrend looks solid, but there are signs it may not hold the bullish momentum in the longer run.

Gold (XAUUSD) seems to be forming a rising wedge-like pattern on the chart (see below). Although the Bollinger bands are widening, thus indicating that gold is in the initial stage of a trend, breakouts from rising wedges are 2/3 of the time bearish.
The relative strength index currently indicates bearish divergence, forming a triangle-like pattern. Keep an eye on the trend lines drawn on RSI as they usually point out the direction of the trend before it is confirmed on the price graph.

However, a wedge breakout usualy occurs about 60% of the way to the apex, where the two trendlines meet, and we are not even halfway, so expect some choppy price movements within the two lines. 

Statistically a breakout is bearish about 70% of the time (according to Bulkowski). If a breakout is bearish, the price could potentially drop to the pattern low (around $1,045/oz), but a level higher than that is more likely though it cannot be calculated until the breakout occurs.
Support levels are $1,200 and $1,100/oz.

A bullish breakout for gold could target the $1,400-1,430/oz level. But it is easier to calculate once we know where the breakout occurs.

Gold price forming a rising wedge
Gold weekly
Source : Saxo Bank

In the short term, gold's uptrend looks solid as long as it keeps above $1,300/oz. A retest of the upper long-term trend line is not unlikely.

There is currently divergence on RSI, but it does look like it will break the falling trend line taking out the RSI peak from June 15 (circle on the chart) followed by a likely new high reading. The moving average convergence divergence (MACD) momentum indicator still indicates that there could be more upside. 

If you're long, look out for $1,300/oz. 

Gold price chart with RSI and MACD indicators shown
Gold daily Source : Saxo Bank  

— Edited by John Acher

Kim Cramer-Larsson is a technical analyst at Saxo Bank

01 July
I followed your strategy from yesterday and got a big loss with short position recommendated.e I followed your strategy from yesterday and got a big loss with short position recommendated.e
How many percentage of the chance that price will continue to go up before correction to the downside as per your analysis?
01 July
madiha Ali madiha Ali
Hello sir what do u say how much downside gold can move
01 July
Kim Cramer Larsson Kim Cramer Larsson
As mentioned in the report Gold could very likely test the upprt trend line and resistance at around 1392. If breaking out bullish of the wedge/upper trend line there could be room for 1500.
Downside is also mentioned in the report 1200 and 1100.
01 July
madiha Ali madiha Ali
Ok thanks alot
06 July
Kim Cramer Larsson Kim Cramer Larsson
Gold is breaking bullish out of its upper trend line. Next resistance is 1392 but there are potential to push towards 1430 level
06 July
Hi Kim. Thanks for the update.


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