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Gold Prices Channel Deeper into Bull Flag Formation

Gold Prices Channel Deeper into Bull Flag Formation

James Stanley, Senior Strategist

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Talking Points:

  • Gold Technical Strategy: Longer-term up-trend still alive, near-term bearish channel (bull flag formation).
  • Gold prices are moving lower as investors have responded to a recent uptick in hawkishness from the Federal Reserve.
  • If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

In our last article, we looked at Gold prices after a $50 ramp-higher in the previous four trading days. But as we noted, this had merely brought Gold to a ‘lower-high’ point of resistance, and with a Federal Reserve that had been transmitting a concertedly hawkish tone, prices could be due for a correction to the downside. Since then, we’ve seen Gold move lower by ~$32 as continued hawkish commentary drove US rate expectations higher in front of next week’s FOMC meeting.

Over the medium term, as in since mid-July, Gold prices have been confined within a downward channel as defined by the upper trend-line on price action that can be found by connecting the July highs with the August highs. Given the boost-higher leading into this down-ward sloping channel, this would equate to a bull flag formation, which is often emblamatic of an up-trend in the process of consolidation before it’s next move in the trend-side direction. We look at this bull flag currently showing in Gold prices on the chart below:

Gold Prices Channel Deeper into Bull Flag Formation

Created with Marketscope/Trading Station II; prepared by James Stanley

As we’ve noted numerous times throughout this year, Gold prices are very much being driven by FOMC rate-hike expectations. After the Fed capitulated on the ‘four hikes in 2016’ expectation, Gold prices caught a major bid in February, breaking out of the 2+ year bearish channel. Each time the Federal Reserve has displayed dovishness (passive towards future rate hikes), Gold prices have popped higher. And now with the Fed talking up rate hikes, whether it be in September or December, Gold prices are softening down to levels of intermediate-term support.

The driver for higher Gold prices will likely be the Federal Reserve taking making another dovish move: The big question is when this might happen, and how. While few are expecting any actual movements at next week’s meeting, if the Fed takes on a hawkish stance with eyes towards a hike at their December meeting, very similar to what happened last year; Gold prices will likely be heading for an even deeper retracement. This could expose longer-term support levels at $1,301 (which was also near the September swing-low), or the zone from $1,279-$1,286.

However, for those looking to take on a short-USD stance going into FOMC, near-term support structure will be of critical importance in setting up the bullish position. This morning’s swing low printed above the prior swing low from earlier in September. Should price action respect this higher-low going into next week’s meeting, we could have the makings of a bullish reversal.

Gold Prices Channel Deeper into Bull Flag Formation

Created with Marketscope/Trading Station II; prepared by James Stanley

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

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