Gold (XAU/USD) Price Forecast: Holds 50-Day MA Amid Pennant Formation

Gold pulled back to a low of $3,320 on Tuesday, as it tested support around the 50-Day MA, now at $3,323. This followed a four-line upside breakout last Friday when the combination of a 20-Day MA, 50-Day MA, an AVWAP line, and a short downtrend line (dashed), were exceeded. The breakout was confirmed with a daily close above the top of the range on Friday and again on Monday.

Also, an interim swing high at $3,366 was broken, reflecting strong demand. So far, the subsequent follow-through has been relatively muted. This may be due to gold remaining within a developing pennant consolidation pattern, which tends to dampen volatility.

Resistance Becomes Support – Bullish

Tuesday’s low for the day was a successful test of support around the short downtrend line, AVWAP level, and the 50-Day MA. This is classic bullish behavior following an upside breakout. Prior resistance is tested as support. However, it is not yet clear that support will continue to be seen around the 50-Day line. A short-term sign of weakness will be indicated if it fails. Currently, the 50-Day MA is at $3,323. But the more significant lower rising trendline at the bottom of a bull pennant pattern and recent interim swing low at $3,283, should carry greater weight.

Volatility Contracting

The price of gold has been contracting recently as it moves closer to the apex of the pennant triangle. As it moves closer the likelihood of an upward breakout or pattern failure rises (below $3,283). Range compression can also be seen by the recent 20-Day MA (purple) converging with the 50-Day MA (orange). Given the larger bullish trend for gold, the expectation is for an eventual upside breakout.

That would happen on a rally above the top boundary line of the pattern initially, with a more significant breakout above the lower swing high at $3,451. An initial new record high for gold at $3,578 is derived from a rising ABCD pattern (purple) in development.

Bullish Above $3,375

A rally above Monday’s high will signal a short-term bullish reversal and confirmation of a higher swing high. That will put the top pennant trendline on a collision course with price. And it could be the beginning of the rally that breaks out of the pennant. Nonetheless, gold may also continue to consolidate inside the pennant formation before it is ready to break higher. That scenario must also be considered.

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