Gold (XAU/USD) Price Forecast: Support Zone Faces Critical Test

Support Zone Tests the Bearish Correction

Gold fell to an eight-day low of $4,091 on Tuesday, thereby completing a 78.6% Fibonacci retracement of the prior advance. This put gold in a potential short-term support zone that could continue to stall the larger bearish correction that began following the January peak. Although the broader trend structure continues to point lower and favors an extension of the correction, the current support zone raises the possibility of another counter-trend bounce.

That said, in the short-term, support could hold near the 78.6% retracement zone and lead to a bounce back toward the falling 20-day moving average to again test it as resistance. If gold reclaims the 20-day moving average, it could continue to strengthen toward the 20-day moving average or the recent lower swing high of $4,382.

Failed Breakdown Leaves Bounce Potential

The larger bearish correction showed signs of continuation two weeks ago with an undercut of the March swing low of $4,098. An extended low of $4,023 was reached the next day, but strong intraday buying emerged, establishing a new swing low. So, the bearish continuation signaled by a move below the March low was not confirmed. In addition, support was seen near the confluence of the 61.8% Fibonacci retracement of the advance that began from the May swing low and the midline of a falling trend channel.

The bounce from that zone confirmed support, but the result was another lower swing high that defines the downtrend. There was also a long-term uptrend line near that price zone, and it is now aligned with a price area near the June low. This means that within the next day or two, the uptrend line would need to fail before the June low is broken. Given the initial bullish reaction following the new low two weeks ago and the nearby rising trendline, the potential for another bounce from Tuesday’s lows should not be dismissed.

Bullish Reversal Signal to Watch

A rally above Monday’s high of $4,221 would signal a short-term bullish reversal and a reclaim of the 10-day moving average. That could then lead to a test of the 20-day moving average, now near $4,319. Whether that occurs or not, price behavior around the current support zone should provide an early indication of whether the broader correction is ready to resume or if buyers can generate another short-term recovery. Notably, a short-term reversal could be the beginning of a sustainable bottom and a larger advance.

If you’d like to know more about how to trade gold and silver, please visit our educational area.