Now that we have broken above that downtrend line, I think a lot of traders are going to start looking at this as a bullish market.
Gold markets initially tried to rally during the trading session on Tuesday but gave back the gains rather quickly, as we may have gotten extended. The market had broken above the major downtrend line, and the massive candlestick that we had seen formed on the Monday candlestick is a sign that we are going to go higher, but we may need to pull back in order to find enough value hunters. Once you make a major move above a significant resistance barrier, quite often you will see the market go neutral or perhaps even pull back a little bit to offer value that should continue to open up a move to the upside.
Keep in mind that gold is running on the back of a weakening US dollar and yields in the United States are dropping. The bond market in the United States is going to continue to be the most important thing you pay attention to, because it comes down to whether or not there is a “real rate of return” when it comes to bonds. With that being the case, you need to pay attention to the US dollar as well, because if it starts to strengthen for whatever reason, that will work against the value of gold also.
The reality is that the market probably needs to retest the area underneath near $1850, perhaps even lower than that. I do think that it is only a matter of time before the buyers get involved and take advantage of value as it occurs. The massive candlestick from the previous session on Monday suggests that there is still a significant amount of interest in this market, and volume did pick up just a bit. That is what you want to see, a bit of volume on a breakout like we had. Longer term, I think the market probably goes looking towards the $1950 level, which is an area where we had seen massive selling previously. Now that we have broken above that downtrend line, I think a lot of traders are going to start looking at this as a bullish market. However, we still need some type of catalyst to get the ball rolling. On either a supportive candlestick near the $1850 level or a break above the candlestick for the trading session on Tuesday, I would be a buyer.