We argued that the 200-day average prove pivotal for gold and, while that hurdle is now cleared, one more stands in its way of further declines.
After bobbing along the 200-day average for a short while, gold decided it was time to break out of a bear flag and clear the 1301.56-1305-87 support zone. If the bear flag projection is to materialize, we could be headed for the October lows around 1260. Yet, what currently threatens this potential scenario is the bullish trendline form the December 2016 lows.
Currently consolidating above the trendline, yesterday provided a bullish hammer after failing to break below 1285.17 support. That it closed back above the trendline and within the consolidation range would not have gone unnoticed by gold bugs either. So, if we are to see bullish momentum return and take gold back above the 200-day average, it would be a reasonable assumption that the longer-term bullish (albeit sluggish) trend is back.
However, there’s still potential for this to break lower. We’ve seen two clear legs of bearish range expansion towards the trendline and the current consolidation could just be part of a low-volatility retracement. Furthermore, the bearish candle that cleared the 200-day average and 1301.56-1305.87 support zone saw gold sell-off across the board to suggest it was not just another ‘greenback strength’ storey.
If we look at an FX major gold basket (which shows the average price of gold against all 8 majors) we can see bearish range expansion on May 15 was widespread. Averaging a 1.2% decline on the day, it was the basket’s most bearish session in a month and its second most bearish this year. So, with XAU/USD now in a new range, beneath $1,300 and consolidating at the lows, we wouldn’t write off a break of the bullish trendline just yet.
This is where sitting on one’s hands can come into play, as until we see momentum return in either direction, it’s hard to know which way this can go. But a clear break of yesterday’s low assumes an invalidation of the 2016 trendline and a short position could be considered.