Gold Range Tightens; Break-Out Scenarios in Play

Technical Sentiment: Consolidation

Key Takeaways

  • Gold’s trading range will continue to narrow until a break-out occurs;
  • 50-Day Moving Average provides resistance at $1307;
  • Support extends as low as $1282-$1284

While intraday traders may be focusing too much on “gold strengthening above $1300” / “gold weakens below $1300”, this large round number is not the real level of interest in the current market conditions. Gold has been stuck in a triangle formation and the boundaries of this triangle, not the $1300 handle, represent the key levels which will determine the direction of the break-out.

 

Technical Analysis
Gold 20th May

Even without the aid of trendlines or moving averages, it is clear that gold has been pressured from both directions. The range has been increasingly tighter as the precious metal formed Lower Highs and Higher Lows, the necessary conditions for a perfect triangle formation.

The large moving averages do not provide too much information at this point mainly due to the location of the triangle, right on the 100-Day SMA and 200-Day SMA. The 50-Day Moving Average coincides with the resistance at $1307, yet price action already confirmed the resistance trendline. Thankfully, gold’s movement as of late have not been chaotic, consequently most pivot levels since April have been respected. In the case of a break-out we can rely on several levels.

For a bullish scenario Gold needs to maintain the Higher Lows configuration. Support has been confirmed around $1288 in recent days, yet the triangle support extends as low as $1282-$1284. A bullish break-out will be confirmed on a rally above $1307. This move will first target $1314-$1315, with a main target around $1331 (April 14th top).

The bearish scenario first has to clear this week’s low in order to test the triangle support. Even if a break below $1282 will show price outside the triangle formation, only below $1277 Gold will be completely bearish after invalidating the Higher Lows configuration. The first target for bears will be $1268 (April 24th Low), followed by support levels $1260 and $1231.

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Prepared by Alexandru Z., Chief Currency Strategist at Capital Trust Markets