Gold’s Big Breakout: Could 5-Month Highs Be Next?

Since topping out at 1345 one month ago, gold hasn’t given bulls anything to cheer about. The yellow metal has put in a series of short-term lower highs and lower lows, culminating in last week’s drop to the 61.8% Fibonacci retracement at $1280. Since then, a bout of risk aversion has taken hold of the market, driving traditional safe havens like the US Dollar, Japanese yen, US Treasuries, and gold to new heights; in fact, with most of those conservative assets hitting their highest levels of the year, some traders are arguing that gold may have some catching up to do.

Gold’s daily chart reflects this shift toward risk aversion. The entire drop from the early July high created a clear falling wedge pattern; despite being created by a series of lower lows and lower highs, this pattern is typically seen as a bullish signal because it shows declining selling pressure on each additional thrust lower. Once we saw the big breakout yesterday, which also created a Bullish Marubozu Candle on the daily chart, the outlook for the commodity shifted strongly to the topside. Today’s move above the July 29 high added the “cherry on top” of the bullish sundae from a price action perspective.

Meanwhile, the RSI broke out of its corresponding falling wedge pattern in tandem with price, and the slightly slower MACD indicator is also turning higher today, signaling a shift to bullish momentum. With both the MACD and RSI confirming the move in gold’s price, traders can have more confidence that the next move will be higher from here.

Moving forward, gold bulls may start to turn their eyes toward the Fibonacci retracements of the July dip at $1320 (61.8%) and $1331 (78.6%), followed by the 5-month high at $1345. The short-term bias will remain to the topside as long as prices remain above the 50-day MA near $1300.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.




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