Gold Update: Recent Dump Conceals Ultra Bullish Outlook

The Gold/US Dollar (XAU/USD) pair looked ripe for a massive breakout early this year. Bulls were raring to kickstart an uptrend as they mounted multiple attacks to take out resistance of $1,355. Unfortunately, momentum significantly waned after each failed attempt. Eventually, bulls retreated like a battered army fleeing from what seems to be an unconquerable fortress.

Bears may have won the battle but they are losing the war. In this article, we reveal how this pullback puts Gold in a position to launch a massive bull run.

Gold Bearish Exhaustion on the Daily

XAU/USD lost over 11% of its value in three months. Those who bought near $1,355 in anticipation of a breakout would have likely cut their losses. This explains the bearish flag and bearish pennants on the daily chart. Numerous stop losses were triggered at certain price points.

While many investors would have been upset by the disappointment, this retracement can’t go on forever. In fact, a closer look at the pullback shows that bears are losing momentum.

Daily chart of XAU/USD

Usually, a bearish or a bullish run could only generate three continuation patterns in the form of flags and pennants. Exhaustion sets in after the third continuation pattern and that’s what we’re seeing in the daily chart of XAU/USD.

Both the RSI and the MACD are flashing bullish divergences. On top of that, the RSI is in oversold territory while the MACD line has just crossed the signal line for a bullish cross. If that’s not enough, the trading range is tightening as the pair gets to the narrowest point of a falling wedge.

A reversal is in sight and with it comes renewed hope for bulls.  

Bullish Reversal Pattern on the Weekly

The short-term bearish outlook hides the possibility of a bullish reversal in the near future. Switch to the weekly chart and you’ll see that XAU/USD is on track to print a bullish higher low setup. More importantly, the pair appears to be respecting a three-year trend line.

If this is the case, then the recent drop appears to be the E-wave or the last leg down of an ascending triangle pattern.

Weekly chart of XAU/USD

Considering the bearish exhaustion on the daily, it is highly probable that the pair would stay on top of this trend line. That should put XAU/USD in a very good position to finally claim the $1,355 resistance level. Above $1,355, there’s little that can hold Gold back.

Minimal Resistance After the Breakout

If XAU/USD breaks out of the ascending triangle pattern, there’s little that can stop the pair from making new highs. A look at the monthly chart reveals that the pair might struggle around $1,498.97 and at $1,830. The former is the 78.6% Fibonacci level while the latter is the last line of resistance. Take out those two and the coast is clear.

Monthly chart of XAU/USD

Once $1,355 is breached, the sheer force of the breakout should make it easy for bulls to take out $1,498.97. By then, bulls have one more obstacle in $1,830. All time highs are often tough to breach. However, a fresh uptrend from the breakout of $1,355 should make it very likely for XAU/USD to register new all time highs.

Bottom Line

Gold has been bearish recently. However, it appears that this weakness is a temporary setback. A look at longer time frames reveals an ultra bullish outlook for XAU/USD.

Featured image courtesy of Shutterstock. 

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.