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Overbought Conditions Spark Pullback
Upside breakouts of two rising trend channels, the shorter one marked with blue lines and the longer in with purple lines, triggered in recent weeks. The breakouts indicated an acceleration in the advancement of the trend and moved the price of gold closer to an overbought condition that could lead to a bearish pullback. Yesterday, it reached a new record high of $3,500 before sellers took back control and dropped prices lower into the close. Subsequently, a bearish shooting star candlestick pattern formed, and it triggered today.
Bearish Reversal Followed ABCD Projected Target
Tuesday’s high reached a 1618% projected target for a rising ABCD pattern (purple). And the advance completed an initial estimated target of $3,458 from a small bull flag pattern discussed in earlier articles. Given the subsequent bearish reaction following the new record high, that was confirmed by bearish follow-through today, gold may need a little time to retrace or consolidate before it is ready to proceed higher.
If it fails to strengthen before the end of the week, gold may establish a bearish shooting start pattern on the weekly chart. It would need confirmation on a breakdown below this week’s low, and if triggered it would signal a one-week bearish reversal. That would add to the likelihood of an eventual test of lower prices.
Key Potential Support Around 20-Day Moving Average
Lower trend support is around an uptrend line and the 50-Day MA, now at $3,033. Currently, the two lines have converged around a similar price area. And the 50-Day line continues to rise towards another potential support zone at the 78.6% retracement level at $3,073. Nonetheless, the 20-Day MA, currently at $3,167, has converged with the 61.8% Fibonacci retracement at $3,164 and a prior trend high of $3,168. The 20-Day MA along with those price levels mark an area of strong potential support. Moreover, how the price of gold behaves around those price levels should provide clues regarding demand.
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