Gold (XAU/USD) Price Forecast: Wedge Breakout Suggests Further Downside

Narrow Range Consolidation

Gold continued to consolidate within a narrow range on Friday near support of the 20-day moving average. It has been testing support of that average for four days, following a trigger of a rising bearish wedge formation on Tuesday. That first day down found support at $4,996. Gold has since traded in a relatively tight range largely in the lower half of Tuesday’s range. This sets up a potential small bear-flag-type situation likely to resolve downward, consistent with the wedge breakout. The three-day range shows support at Thursday’s low of $5,051.

Pullback and Resistance

Typically, a pattern breakdown is followed by a swing back to test prior support as resistance. So far, this dynamic has produced a three-day sideways pattern, reflecting continued downward pressure. However, if there is a higher pullback above Wednesday’s high of $5,206, it may not get far before buyers reassert control. Active traders will be watching for higher prices as a potential lead-in to further downside from the wedge pattern. The lower boundary line of the pattern marks potential resistance, along with an interim swing high at $5,250.

Downside Objectives

A downside measuring objective for the wedge suggests that additional tests of support near the February higher swing low of $4,402 may be forthcoming. This zone is also near the October peak at $4,381. But before reaching that lower price zone, higher potential support levels need to fail.

Key Moving Averages to Watch

The 50-day moving average is at $4,869. It shows dynamic support for the uptrend after it was reclaimed in August. Since support was seen near the 50-day moving average during the recent sharp 21.4% bearish correction, it becomes a critical level for the trend. A decisive decline below the 50-day average would show a break below a key dynamic support indicator. Subsequently, the higher swing lows at $4,842 and $4,655 become key levels to monitor. A drop below each will further confirm a bearish reversal of the recent rally, which takes the form of a rising wedge.

Longer-Term Trend Considerations

Since the price of gold was overextended recently, leading to a sharp three-day high-to-low bearish correction of 21.4%, correction may take some time to complete. Further consolidation above the top of a rising trend channel remains possible, in addition to the scenarios outlined above. In this regard, the 100-day moving average at $4,517 may provide a proxy for the top of the channel, as it is close to converging with it.