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Gold has plummeted more than 14% off the January highs with price registering fresh yearly lows into downtrend support this week. Today’s response to technical support threatens a near-term recovery in price with momentum extremes and shifts in trader sentiment further highlighting this risk. Here are the updated targets and invalidation levels that matter for Gold. Review this week’s Strategy Webinar for an in-depth breakdown of this setup and more.

Gold Daily Price Chart (XAU/USD)

Gold Daily Price Chart

Technical Outlook: In last week’s Gold price forecastwe highlighted the consolidation in price just above long-term support at 1204. We noted that a, “break lower from here targets subsequent objectives at the 50-line around ~1190s backed closely by a structural support confluence at 1175/80(area of interest for possible exhaustion / long-entries IF reached).” A decisive break early in the week fueled an accelerated sell-off with price registering a low at 1160 / pitchfork support before reversing sharply yesterday. Note that the low was just pips ahead of pitchfork support- so was that it?

Gold prices are poised to close lower for a sixth consecutive week- the last four instances of such an occurrence were at the December 2016 lows (down 7-weeks), the November 2015 lows, the August 2015 lows (down 7-weeks) and the July 2010 low. In each of these instances, price advanced a minimum of 9% in the following weeks. With that in mind, momentum is still deep in oversold territory and while the broader risk is still lower – IF price is going to rebound, this would be a good spot to look.

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Gold 240min Price Chart (XAU/USD)

Gold Price Chart 240min

Notes: A closer look at price action further highlights today’s reversal off slope support with gold testing initial resistance back at 1180. Subsequent resistance targets are eyed at 1194 and 1204- a breach above this threshold would be needed to suggest a more significant low is in place. A break of these lows keeps the broader focus on longer-term support at 1124/30.

Why does the average trader lose? Avoid these Mistakes in your trading

Bottom line: Price has responded to down-trend support and threatens a larger recovery a close above 1180 would bode well for a near-term rebound. That said, trying to call THE low is a fool’s errand and we’ll respect a break of this downslope with such a scenario likely to fuel accelerated losses towards the 2014 lows in gold prices. From a trading standpoint, reduce / close short-exposure here – be on the lookout for evidence of price exhaustion.

For a complete breakdown of Michael’s trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

Gold Trader Sentiment

Gold Trader Sentiment
  • A summary of IG Client Sentiment shows traders are net-long Spot Gold - the ratio stands at +5.92 (85.6% of traders are long) – bearish reading
  • Long positions are7.7% lower than yesterday and 8.4% lower from last week
  • Short positions are 5.6% lower than yesterday and 7.7% lower from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Gold price trend may soon reverse higher despite the fact traders remain net-long.
  • Note that although price registered a new low, sentiment did not stretch into a new extreme (high) – a divergence often seen at market turns.

See how shifts in Gold retail positioning are impacting trend- Learn more about sentiment!

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- Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex or contact him at mboutros@dailyfx.com