Gold Prices Snap Back: Pullback, or are XAU/USD Bulls Finished?

Gold Talking Points:

• Gold prices held strong last week even as USD strength remained for the 7^th consecutive week.
• On Wednesday of last week spot gold prices began to test a resistance level at 1948, which is the 61.8% Fibonacci retracement of the recent sell-off. That held the highs into the end of the week and so far for this week, prices have been pulling back. This raises the question as to whether the bullish move of the past few weeks is finished or whether bulls come in to show higher-low support.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

It had been a strong couple of weeks for gold prices as we opened this holiday-shortened week in the United States. The fact that gold bulls were able to hold support last week, even as USD strength was coming back online in a big way from Wednesday, was a deductively bullish factor and this seemingly kept the door open for buyers.

Now that we’re just past the half-way point of this week buyers still have some work to do if they want to keep that bullish theme alive. The initial support zone that runs from 1925-1932 has failed to hold the lows, and sellers are now pushing down to the next spot of support potential, running from Fibonacci levels from 1903 up to 1909. The 1909 level is the 23.6% retracement of the recent bearish move, and this is from the same Fibonacci study that produced the 61.8% marker at 1948, which is holding the current high. And there was even some support at the 50% mark of 1936 and another attempt from bulls to hold support at the 38.2% mark yesterday. The 1903 level comes from a longer-term study, as the 38.2% retracement of the September-May bullish move in spot gold.

Gold (XAU/USD) Daily Price Chart

Chart prepared by James Stanley, Gold on Tradingview

Gold’s Bigger Picture – From One Wedge to Another

I’ve been tracking the short-term falling wedge shown above in bright red for the past few weeks. The shorter-term wedge formed with a tight series of bearish candles that also held some form of consolidation as denoted by the wedging displayed in price action.

Such formations are often approached with the aim of bullish reversals, and that’s precisely what started to happen in late-July as bears failed to produce much drive below the $1900 psychological level, which soon allowed for the bullish reversal to price in. And that theme ran cleanly for a week and a half, until resistance at 1948 played in.

As noted earlier that price is a 61.8% Fibonacci level, but you probably also noticed that there’s a trendline in that same space that makes up another longer-term falling wedge formation.

That trendline was tested through multiple times in the back-half of last week, and there was even an attempt to hold support there until bears were able to break ground this week. But, that formation remains of interest and can retain potential for a bullish scenario as long as buyers can hold higher-low support of the recent topside move.

The most recent higher-low was on August 25^th and this printed right around the 1903 Fibonacci level. So this would be the spot that bulls need to defend to keep that topside theme going.

Gold (XAU/USD) Daily Chart – Longer-Term

Chart prepared by James Stanley, Gold on Tradingview

Gold – The Bearish Scenario

Given that we have a recent support breach, I’d be remiss if I dismissed the possibility of bears taking over to drive a push back to the 1900 level.

The backdrop here would be longer-term in nature, with that same three-year-range that I’ve been talking about for the past few months. The $2,000 psychological level is a key spot on the chart and its been tested thrice but, at this point, bulls have been unable to leave it behind. If we think of the context around the past two tests above 2k, that makes sense as the Fed has been engaged with some form of policy tightening for each.

If we do see a legitimate pivot from the Fed, there could be wherewithal for continuation beyond 2k, very similar to the way that the 1k test played out in gold back in 2008 and 2009. In that instance, it took 18 months from the first test until gold could finally drive above the big figure. But what ultimately helped to drive that move was a loose and passive FOMC, which we haven’t seen since the Fed began their hiking cycle in March of last year.

With inflation remaining in a somewhat stubborn fashion that passive backdrop from the Fed isn’t quite here and until it is, the three-year-range in gold prices could retain some attraction.

From a technical perspective, a failure from the longer-term wedge and a re-test of support in the 1900 area can begin to open the door for a steeper slide. The next major levels of focus after that are 1848 and then the 1793-1806 zone, which was last in-play this past March, right around the time that the regional banking crisis began to show in the United States.

The Fed has hiked twice since then, and there’s possibility for more hikes as PCE just printed at 4.2% last Thursday. And so far, gold has held up relatively well, considering how quickly USD strength has come back online over the past couple of months.

Gold Weekly Price Chart

Chart prepared by James Stanley, Gold on Tradingview

--- written by James Stanley, Senior Strategist