Wedge Trigger Sparks Selloff
Gold is set to complete its sixth day of forming a narrow consolidation pattern near support of the 20-day moving average. This drop in volatility followed a downside trigger of a rising wedge bearish pattern last Tuesday. That led to a sharp selloff to a seven-day low of $4,996. The low remains a key near-term support level since the following six days have traded tightly, within the range of the breakout day.
A decisive continuation of the classic bearish pattern suggests a lower support area will likely be tested before the decline is complete. This behavior highlights how the market has shifted from the sharp wedge-triggered selloff into a temporary pause, potentially setting up the next directional move.
Flag Formation and Key Support Zones
Consolidation that has followed the wedge trigger is starting to take the form of a small bearish flag pattern. On the weekly chart, this pattern appears as an inside week. In its current form, the flag would trigger below $5,015, and again below $4,996. The rising 50-day moving average shows dynamic support for the uptrend near $4,914, along with a higher swing low of $4,842.
Since the price zone near the 50-day average ended the recent sharp bearish correction at $4,402, there is a good chance that support will be strong near the average if approached again. This is particularly the case since it ended a sharp 21.4% decline in the price of gold. The wedge trigger was followed by only one day of sharp selling, leaving room for a potential second leg down.
Testing the 50-Day Average
Since the 50-day average is rising and closing in on recent price action, it will be interesting to see if the average will converge with price before a test of the line is attempted. That could result in gold failing to follow through on the wedge breakout or alternatively lead to a more decisive break below it. An initial target from the pattern is near the low of $4,402. This does not necessarily mean it will be reached, but it highlights the natural potential of a continuation of the wedge breakdown.
Downside Targets and Trend Implications
The bearish implications of the wedge put the 50-day moving average at risk of being broken. A second leg down should be accompanied by strong bearish momentum, which may break the 50-day average support line. If that happens, and the $4,842 level also fails as support, the 100-day moving average becomes a downside target. It is now at $4,543 and rising towards the top boundary line of a rising trend channel. Such a development would reinforce the bearish implications of the wedge breakdown discussed at the beginning of the analysis, confirming that the current consolidation was likely a pause before another leg lower.