Gold (XAU/USD) Price Forecast: Eyes Breakout Inside Pennant Formation

Volatility in the price of gold declined further on Thursday as it consolidated within a relatively narrow range. The high for the day at $3,330 was a successful test of resistance at both the 50-Day MA and short downtrend line (dashed). Notice that the two lines have almost converged to identify a similar price level. Following a touch of the trendline, sellers took back control and drove gold lower. At the time of this writing, trading has returned to the lows of the day. A daily close in the lower quarter of the day’s trading range, which is where it is now, would show sellers retaining control.

Short-term Breakout Close at Hand

Since a dashed resistance trendline is close to crossing a lower solid rising trendline, volatility should expand soon as one of the lines will be broken by July 18. Those lines form a small symmetrical triangle. Their convergence shows volatility declining, which can also be seen in the 20-Day MA and 50-Day MA moving closer to one another.

Correction Reflecting Underlying Strength

Gold is trading within a pennant consolidation pattern around the highs of the long-term bull trend. It indicates the potential for an upside breakout, with a likely new record high to follow. Following the $3,500 record high in April, gold weakened with a bearish retracement. Support for the decline was seen at around both a 38.2% Fibonacci retracement level and the 50-Day MA. The bounce off the 50-Day line retained the integrity of the uptrend, and buyers taking back control near the Fibonacci level reflected strong demand.

Upside Breakout Anticipated

The pennant is a trend continuation pattern, so the expectation is for an eventual upside breakout. That would first be indicated on a rally above the top boundary line for the pattern, with higher conviction on a sustained rally above a lower swing high at $3,451. A daily close above that level will confirm that breakout.

However, given the relationship to resistance around the dashed downtrend line and the closeness to the small triangle apex, an upside breakout could be coming soon. When multiple indicators come together to identify a similar price level during at the time that a breakout could happen, there can be a more significant reaction in price.

Above $3,346 Points Higher

Nonetheless, a decisive bullish short-term reversal is not triggered until a minor swing high of $3,366 is exceeded. Earlier signs of strength will be on a rally above today’s high, followed by a breakout above a three-day range at $3,346. On the downside, a drop below $3,283 indicates a failure of the bull pattern.

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