Gold and silver have been in a strong downtrend for several years (see image below) but there are signs on the chart that a turnaround could be near…
This blog post discusses the potential for a reversal and what that means for you as a trader.
XAUUSD DOUBLE BOTTOM
The strongest bearish momentum occurred when XAUUSD (gold) dropped about 35% and fell from $1795 to $1180 in three quarters of a year (see purple circles in image below). But after that strong decline, price action changed gears to a more moderate sloped downtrend (orange trend lines).
During these last 2 years bears were still in control but the enthusiasm of the downtrend surely lost its spark and most recently signs of a potential turnaround appeared on the chart.
- Price action pattern: bullish engulfing twins appeared on the chart last week which the lack of bearish momentum (black circle). This occurred during the FOMC event of last week when it became clear that rate hikes could be limited in the future.
- Failure to break the previous bottom: the engulfing twins occurred at the previous bottom. Price therefore bounced back up at the support level which indicates a potential double bottom on the weekly chart (green circles).
- The angle of the downtrend is weakening which means that there is divergence present.
XAGUSD (silver) has a very similar situation as the XAUUSD. It too was in a strong uptrend at the beginning of the decade, which then was replaced by an equally powerful downside. The main difference between silver and gold is that silver fell substantially further than gold.
XAGUSD is also showing signs of a potential reversal. The clear divergence between the most recent bottoms highlights the lack of bearish follow through and momentum – see the purple lines on price and on the MACD in the screenshot below.
Also price action showed significant problems for the bears last week when bullish engulfing twins emerged on the chart as well (black circle).
TRADING THE REVERSAL
I would rather look for a reversal setup on gold considering the fact that silver had a stronger downtrend than gold. When zooming into a daily chart I will not take a long right now because the rally is running into a resistance zone (purple box).
I am interested in taking a long when this current momentum fades and price makes a retracement back down. I will move the current Fibonacci retracement and adjust it to the new top (see image below how the current Fib looks like). That way I will have the valid Fib level on the chart when the correction back down occurs.
I am looking for longs when price retraces to the 50% and 61.8% Fibonacci levels (green circle). Stop losses should be below the swing low bottom (red circle). Targets can be any of the Fibonacci minus levels but the -61.8% is the best as a balanced target and the -161.8% works well as an extended target (blue circle).
What do you think of the commodity pairs?
Let us know down below!
Thanks for sharing and wish you Happy Hunting!
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