Gold’s Decline Seems to be Overdone

Watch the descending triangle pattern

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The precious metal has been posting declines for three consecutive weeks so far. Price action closed at 1703.12 on Friday, marking a nine-month low. The declines accelerated after gold failed near the key support area of 1800.

Looking at the daily chart, we see that prices closed slightly bullish on Friday. But despite the gains, prices were still below Thursday’s high.

However, zooming into the lower chart timeframes, we see that the price action is a bit overstretched. As a result, the Stochastics oscillator has formed a bullish divergence.

Amid the recent declines, there is also the descending wedge pattern forming near the current lows. A successful breakout to the upside from this descending wedge pattern could confirm the upside. Therefore, watch for gold prices to close above the 1707 level. A successful close above this level will potentially open the way for the precious metal to post a correction.

We expect the correction to potentially rise back to the 1800 level. However, ahead of these gains, the next key resistance area is near 1759.80. Alternatively, if gold fails to break out higher, then we could expect to see a further continuation to the downside.

The next key support level will be seen near the 1650 handle.

Economic outlook

On the economic front, data is somewhat quiet with only the ECB monetary policy meeting on tap this week. As far as the ECB is concerned, no major changes are expected.

However, the recent turmoil in the bond markets, both US and Europe could spark some comments from ECB Chief Christine Lagarde.

Furthermore, the European economy continues to remain fragile, while the ECB has ruled out further expanding its bond purchases for the moment. Currently, the tug of war between investors and central banks continues.

Elsewhere, we have the US. inflation data coming out this week, but the impact of the report on gold could be limited.

Over the weekend, the US Senate also passed the coronavirus bill. Shortly thereafter, President Biden said that the stimulus checks could be sent out later this month. This new additional stimulus could potentially impact gold prices to the upside in the near term.

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