Gold Price Forecast: Gold Builds a Bear Flag at a Big Resistance Level

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Gold Talking Points:

  • Gold prices put in a major breakout at a very key level last week.
  • The potent combo of a dovish FOMC and a really strong inflation print helped to drive real yields lower, which helped to support topside in Gold even as the US Dollar gained.
  • Gold is holding within a bullish channel that’s seen 50% of the recent bearish trend clawed back, making for a bear flag. Buyers can look for pullback themes to the 1834 level while sellers may have their open door to take a shot at pullback/reversal themes.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

It’s been a tough year for Gold bulls, and that can even span back to last November 9th to go a little longer than the past year. November 9th was a key day as this was when word of vaccines started to make its way through markets, about a week after the US Presidential Election.

At the time, the bullish trend in Gold appeared good to go, with price action holding support around the 23.6% Fibonacci retracement of the 2018-2020 major move. But, as positive news around vaccines started to circulate Gold prices were punished to the tune of 5% that day, with price action making an immediate retreat back down to support.

The next four months were equally discouraging on the long side, as prices continued to trickle all the way down to the 1680 level in early-March, which finally started to show some support. This is around a 38.2% Fibonacci retracement and this price ended up producing a double bottom formation in March/April.

Gold Daily Price Chart

Gold daily price chart

Chart prepared by James Stanley; Gold on Tradingview

From Double Bottom to 1900

That double bottom formation produced an outsized reversal setup. After a second test at the 1680 level in March, I started to look at the potential for a greater bullish reversal, and that started to show in mid-April and through May.

Prices ran all the way up to the 1900 psychological level but, again, were thwarted by sellers at resistance. This is also around the time that the Fed started to talk up the prospect of asset purchase taper, which brought along the implication for an eventual lift-off for rates. By early-August, prices had already tipped-over for another test around that 1680 level. The bounce from that price went right back to the 1834 area, of which there were already three failed tests. This price held resistance into last week’s trade until, finally, bulls were able to punch through.

That breakout has continued to run, setting a fresh five month high at the 1877 level. Lurking just above is the 1900 psychological level, which helped to turn around that bullish advance in June.

Gold Daily Price Chart

Gold daily price chart

Chart prepared by James Stanley; Gold on Tradingview

Gold and USD

At this point, both Gold and the US Dollar have put in strong bullish trends over the past week. The driver has been expectations for the Fed to react to inflation but perhaps even more to the point, the continued drive of inflation is pulling both of these trends.

The big question is when the Fed might actually pivot into a more hawkish stance which, to date, hasn’t yet happened. The December FOMC rate decision may present that situation but the Fed will likely be cognizant of the overall risk trade and the potential to work against the recovery that all of this stimulus has been driving for.

But taking a more recent snapshot of price action in Gold, and applying a Fibonacci retracement to the pullback move from last August’s high down to this year’s low, and we can see where prices are right at the 50% marker of that major move, plotted at 1876.02.

There’s also a bullish channel that, when paired up with the prior sell-off, makes for a bear flag formation.

If bulls can force a breakout beyond that 50% marker in the near-term, it would also invalidate the bear flag and this would be very bullish for Gold prices. For bulls, a breach of the 50% marker opens the door for bullish breakouts, while a re-test of 1834 keeps the door open for bullish trend entries.

For shorts – a hold near resistance may be their shot for playing pullback and possible reversal themes.

Gold Daily Price Chart

Gold daily price chart

Chart prepared by James Stanley; Gold on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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