I think at this point we are simply trying to figure out where to go next, so I am going to default towards taking a technical breakout of this little “mini consolidation” more than anything else.
Don't let fear prevent profits!
Gold markets initially tried to rally during the trading session on Tuesday to break above the 50-day EMA quite handily. However, we pulled back later in the day as the US dollar got a bit of a boost, and perhaps more importantly, money was flowing into the bond market. By giving back the gains the way we have, we have ended up forming a bit of a shooting star, which is a negative sign as well.
There are a few things to pay attention to from a technical analysis standpoint at this point. For starters, the previous candlestick was a hammer, which directly contradicts what we have seen during trading on Tuesday. When we see a hammer followed by a shooting star, it almost always means that we are going to enter some type of short-term consolidation phase, meaning that we will see the market simply struggle to find directionality. Beyond that, we also have the 50-day EMA sitting right there along with the 200-day EMA and flattening out. This tells me that at the very least we are probably going to go sideways.
One of the easiest ways to trade this setup is to simply take the direction that the market goes as it breaks either above the shooting star or below the hammer. If we can break above the top of the shooting star, then it is likely that we would go looking towards the $1860 level. On the other hand, if we break down below the bottom of the hammer, then it is likely that we would go looking towards the $1750 level. That is an area that was massive support previously, and I would anticipate that there should be a certain amount of interest in this market if we get close to that region. If we break down below there, then it is very likely we would go looking towards the $1680 level, as it was a bit of a “double bottom” in the market as you can see.
Pay close attention to the US dollar, because if it starts to pick up strength again, that will almost certainly work against the value of gold. I think at this point we are simply trying to figure out where to go next, so I am going to default towards taking a technical breakout of this little “mini consolidation” more than anything else.