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Gold on the Verge of a Breakout?

Published 12/05/2022, 08:30 PM
Updated 01/08/2024, 02:05 PM
  • Near-term outlook improves
  • Weakness can be used to accumulate
  • Watch for a new breakout above 200-day SMA

In the monthly chart for XAU/USD, we see a large cup with handle trend continuation pattern forming for over ten years. A choppy handle starts from the August 2020 breakout high of $2,074.98.

XAU/USD monthly chart.

Near-term correction shows signs of completion

Once the handle consolidation pullback low is set, the larger bullish nature of the long-term uptrend has a chance to kick in. So far, the handle low was found recently at $1,614.64. That low completed a 22% decline from the most recent swing high of $2,070.35 and a 50% Fibonacci retracement of the prior internal uptrend.

It is also important to note that spot gold tested support around the $1,614.64 low over six weeks, and it could not fall through a bullish sign. Subsequently, XAU/USD rallied off that low and has since provided a bullish monthly signal as the October high was exceeded on a monthly closing basis.

Broadening formation should be watched

Further, the lower trend line across the bottom of the handle consolidation phase has established the bottom of a large broadening formation. The top ascending trend line established the prospect for such a price pattern, and the lower line confirmed it once a bullish reversal occurred off the bottom line. The target for such a formation is the top of the pattern, providing further supporting evidence for an eventual continuation of the bull run for XAU/USD.

Weekly chart analysis

This next chart showing weekly candles takes a closer view of more recent price action. A bullish continuation was triggered two weeks ago as XAU/USD broke above a one-week pullback. On a weekly basis, the uptrend could continue unless the price drops below the most recent pullback low of $1,727.50. However, a break below last week’s low of $1,739.68 is an earlier sign of weakening, and some traders may not want to wait for the lower signal.

XAU/USD weekly chart.

Triple-bottom breakout

Let’s now zoom in even closer by looking at the daily chart. First, we can see that once XAU/USD rose above $1,729.43, it triggered a monthly breakout and a triple bottom breakout. That resistance pivot was subsequently tested as support on the C wave of an ABCD pattern and held, as shown in the second daily chart.

XAU/USD daily chart.

In the near term, XAU/USD contends with resistance around its 200-day simple moving average (SMA). The 200-day line has been acting as resistance for several days, along with the swing high from August. Therefore, the two key near-term pivots to watch for the next direction are the most recent swing high of $1,809.97 and support around the most recent swing low of $1,723.82.

Given the larger bullish indications discussed herein, a drop below near-term support points to a deeper pullback. Such a decline can be watched for new setups in anticipation of a continuation of the bullish move.XAU/USD daily chart.

Watch for a new breakout above 200-day SMA

At this point, a decisive breakout above the recent high of $1,809.97 is needed to grab the bulls' attention, given the technical strength, it would exhibit. Such a move will again trigger a breakout above the August high and 200-day SMA. Nevertheless, we’ll have to watch how price behaves around the 200-day line to see how sustainable momentum might be.

A break down of higher targets

If the bull move does persist, then there are a few targets that can be watched. The triple bottom target is derived by taking its high-to-low range and then adding that price distance to the trigger price of $1,729.43. In this case, we get $1,844.11. Combining that price level with the 50% retracement of the most recent downtrend at $1,836.96 gives us our first higher price zone of $1836.96 to $1,844.11.

Next up, we have a combination of Fibonacci confluence, an ABCD pattern completion, and a prior monthly low and high. Together, these measures create a price zone from $1,879.45 to $1,889.98.

An ABCD pattern can reflect symmetry between market swings. The classic measure is for the second leg up off a bottom to match the price change of the first leg up. For XAU/USD, the 100% projection is at $1,899.12. In addition, we can also project Fibonacci ratios of 127% and 1.618%, which provide other higher targets of $1,945.80 and $2,005.18, respectively.

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