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Gold Price Forecast: XAU Bull Flag Breakout Begins to Pull Back

Gold Price Forecast: XAU Bull Flag Breakout Begins to Pull Back

James Stanley, Senior Strategist

Gold Price Talking Points:

  • Gold prices put in a strong breakout above a key resistance zone last week, marking a topside break of the bull flag formation that’s been brewing for the past nine months.
  • Gold prices haven’t really slowed down, save for a quick check of support at prior resistance around last week’s FOMC meeting minutes release.
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It’s been a rather unique market backdrop over the past year. Gold illustrates this fairly well as the covid pandemic showed up squarely in the midst of a long-term bullish cycle in the precious metal.

Gold actually started this cycle in Q4 of 2018, sparked by an off-hand comment from FOMC Chair, Jerome Powell. At the time, the Fed had just hiked rates yet again, marking the sixth such move in the prior couple of years. The big question was when the Fed might stop the tightening, but with equity markets remaining buoyant throughout the hikes, there was little reason for the Fed to slow down, or so it was thought.

Powell was directly asked where he thought the ‘neutral rate’ was, which is a theoretical goldilocks rate of perfection where policy is neither stimulative nor restrictive. He responded that he thought it was ‘a long way off,’ leading to the heavy inference that the Fed had plans for many more rate hikes in 2019 and thereafter.

Well, matters didn’t go down like that. In short order after that comment stocks had started to tank. And Gold prices started to pop-higher. In 2019, the Fed actually ended up cutting rates three times, and the Central Bank came into 2020 on their back foots already when covid began showing in American capital markets in February.

Gold rallied through much of this, save for a quick but violent spike during March as matters were really becoming troubling around the spread of the virus. But, as a constant onslaught of stimulus from the Fed continued to buoy US markets, Gold prices got right back on that bullish trend and continued to rally.

It was June when matters really heated up, and Gold prices went near-parabolic as they shot up to a fresh all-time-high in early-August. At the time, Bitcoin was trading below $12,000. Ethereum was below $400.

The next nine months were rough for Gold bulls as the yellow metal continued to claw back those Fed-fueled gains. This entailed a greater than 38.2% retracement of that prior major move. But, as the door began to close on Q1 and open into Q2, matters began to shift.

Gold Weekly Price Chart: The Nine-Month Bull Flag

Gold weekly price chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Prices: The March Pivot

It was the month of March when things began to turn around. Bears remained in-control early in the month, but a low was set at $1680 that was soon revisited a couple of weeks later. At the time, I alerted to the build of a possible double bottom formation which, if it came to fruition, was really exciting because there was finally a short-term justification for strength on the basis of that formation. Double bottoms are often followed with the aim of bullish reversals, but for that to fill in – buyers would need to pose a break of the neckline of the formation.

That happened in mid-April, and a couple of weeks later there was even a pullback to support at prior resistance.

Since then bulls have very much been in the driver’s seat on the matter, pushing prices up to a fresh four-month-high as the focus shifts away from cryptocurrencies and back towards Gold prices.

Gold Daily Price Chart

Gold Daily Price Chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Goes Overbought – What Next?

On that same daily chart, RSI is currently showing an overbought reading. This doesn’t necessarily portend a reversal. It does, however, highlight that now may not be the best time to look at firing on fresh bullish positions. To be sure, the trend remains attractive. But buyers may want to try to exercise a bit of patience here, especially as the US Dollar grinds into its own support.

On the below chart, I’ve identified three potential support zones for bullish continuation scenarios. The nearest, at 1890, is in-play right now. But, below that is another swing of interest around 1874. And lastly, that big spot of prior resistance around 1860 can be approached as an ‘s3’ zone of support. This may come in play if that PCE release on Friday comes out hot, which could bring a quick run of USD-strength that may allow for that ‘s3’ support inflection.

Gold Two-Hour Price Chart

Gold two hour price chart

Chart prepared by James Stanley; Gold on Tradingview

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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