Gold News: Did Volatile, but Orderly 50% Correction Just Set Up Buy or Signal Top?

Gold Whipsaws After 7% Plunge as Profit-Taking Dominates

Spot Gold prices are whip-sawing Friday after a steep plunge of more than 7%. Profit-taking is likely the main cause of the sell-off although some are saying a firm dollar and uncertainty ahead of the appointment of a new U.S. Federal Reserve Chair are giving investors an excuse to lighten up on the long side.

Given that the news services are scrambling to find reasons for the breakdown under $5000 and the heightened volatility, it’s probably best to just follow the price action on the charts. The news is going to be late and we may never find out the reason for the move to the downside.

At 12:31 GMT, XAUUSD is trading $5134.92, down $235.30 or -4.38%.

Why Did Gold Drop So Fast in Two Sessions?

We could pull out a checklist to try to figure it out. Did the central banks suddenly become sellers? We may not find out for a month after all the data is gathered. Is the Fed going to raise rates instead of lowering them later in the year? No, but President Trump may appoint a semi-hawkish new chairman. Did the U.S. navy armada leave the Strait of Hormuz? No, they’re still there.

So why did gold go down so much and so fast in two sessions? How about more sellers than buyers at current price levels. That’s always a good one. Maybe it was The Herd Theory, “he sold and she sold so I just thought it was my turn.”

Near-Perfect 50% Retracement Creates Buying Opportunity

Anyway, we did get the long-awaited dip and a fresh opportunity to buy at more favorable prices, but if you blinked at the wrong time, you may have missed a near 50% correction of the rally from the December 31 bottom at $4274.02 to the January 29 top at $5602.23. A 50% correction of this range is $4938.12, the actual low for the day is $4941.50, missed it by $3.38. Now it’s $200 off that low and most chart watchers are saying the RSI called that top, yeah after the fact with that lagging indicator.

Seriously, don’t get freaked out with the volatility. It tends to be greater as prices increase. Just get back to the basics, what’s the trend? Up. Do we tend to enter in the direction of the trend? Yes. If we didn’t get it at $4274.02 in December and we didn’t like it at $5602.23 on Thursday then where do we like it? Most likely in the 50% to 61.8% retracement zone at $4938.12 to $4781.39. That’s our model right now and it’s a pretty generic chart pattern too, built without any special indicators, just simple math.

Key Support Levels and Uptrend Lines in Focus

Besides the retracement zone and our bias to the upside since the trend is up, what other technical indicators can we lean on? We have an uptrend line at $4775.10 that pairs up with the 61.8% retracement level at $4781.39 that could be an important area later today. We also have an uptrend line at $5125.94 that the market is trying to recapture.

Now that we have identified the support and verified the price action, we should all calm down and not get so distracted by the volatility. We know that the market in two days nearly made an exact 50% correction of a rally that it took 20 trading sessions to build, but I wouldn’t call it a crash. We’ve proved that there is structure there, now comes the tricky part.

Critical Retracement Zone Will Determine Next Move

Looking ahead, well we know that the first leg down from a major top is usually long-liquidation and that if a market has topped out and getting ready for an even bigger break that traders will want to sell the best price possible. Given that scenario, the short-term break is $5602.23 to $4941.50. This means that trader reaction to its retracement zone at $5271.87 to $5349.83 will set the tone. That’s the area we’ll be watching for later in the day. If sellers come in on a test of this area then prepare for lower prices, but if buyers take out this area then it’s off to the races again. Pay close attention to the price action and order flow in this zone.

More Information in our Economic Calendar.