Last Friday, GOLD: $XAUUSD had a technical breakout above the 1848 short-term resistance area, mainly caused by an imminent invasion of Ukraine by the Russian forces.
XAUUSD Daily Chart
After breaking the 1848 resistance, price managed to rally towards the next Fibonacci target at 1883. Some of our traders were hedging with a buy stop order in case this scenario would come into effect even though the majority did not participate in the rally:
(Source: Impulsive Wave Trading).
Now that the Fibonacci level of 1883 is tested, another important question arises:is Gold able to sustain the breakout and continue trading higher towards 1944 next, which is the 161.8% Fibonacci extension?
According to the Bloomberg Intelligence data, Gold has reached another topping level if compared to the previous breakouts, July 2020, May 2021, and November 2021:
(Source: Bloomberg Intelligence).
As you can see from the above chart, yesterday, Gold printed an overbought reading of 186 on the CCI indicator. There is a high chance of a pullback to the breakout level of 1848-1844 soon.
If the risk of a geo-political crisis fades away then there is no reason for Gold to trade at high levels when investors are still unclear what the FED will do next with the interest rates; even though the market is currently pricing in 7 rate hikes for the year 2022 and 2 hikes for the upcoming March meeting:
(Source: Bloomberg Intelligence).
Going back to the Gold's technical chart, it is highly likely to revisit the breakout zone in the coming hours or day at 1848-1844 and then depending which side it closes, we will have more clues. In a nutshell,
A close above the breakout zone in the coming days will give further bullish signals for the uptrend to continue.
Conversely, a close below the 1844 in the coming days will bring back the bearish case for a drop back below the 1800 support area.
Lastly, looking at the correlation between Gold and a few other benchmarks, such as, the S&P 500 index, USD index and the US 10-year yield, we see:
a positive correlation between Gold and the 10-Year yield and,
a negative correlation between Gold, S&P 500, and USD index.
(Source: Bloomberg Intelligence).
As long as the 10-year yield keeps pressuring higher, this situation may keep Gold prices afloat even though when it comes to FED interest rates, it doesn't make sense for this scenario to play out. Nevertheless, considering all the above arguments, we have already positioned ourselves short from the Fibonacci extension and are waiting for a retest of the breakout level at 1848-1844 to scale out of the trade.
Gold correlation with G-10 currencies:
(Source: Bloomberg Intelligence).
Gold correlation with other precious metals:
(Source: Bloomberg Intelligence).
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Trade well and be mindful.
IWT Team
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