Gold consolidation forms bearish pattern near lows

<p>The price of gold (daily chart shown below) has continued to trade within a prolonged consolidation pattern just off its new five-year low of 1077 […]</p>

The price of gold (daily chart shown below) has continued to trade within a prolonged consolidation pattern just off its new five-year low of 1077 that was established only slightly more than a week ago. This consolidation has formed a classic inverted pennant formation that may serve as a bearish trend continuation pattern if broken to the downside.

The current consolidation has fluctuated in a tight range mostly above key support around the 1085 level for the past two weeks, ever since a rapid wave of low-liquidity selling during the Asian trading session on 20th July was compounded by the triggering of stop-losses, prompting a severe plunge from which gold has not yet been able to recover.

Of course, that short period of selling only exasperated a situation where gold demand had long been waning and the strength of the US dollar had long placed a great deal of pressure on dollar-denominated commodity prices.

Gold Daily Chart

 

Having tentatively settled above the noted 1085 support level, which is also around the 161.8% Fibonacci extension of the latest rebound from this past March to May, the precious metal remains technically well oversold.

However, continuing fundamental factors, most notably a further strengthening of the US dollar on expectations of an impending US rate hike, could very well lead to a breakdown of the current pennant pattern towards lower multi-year lows. The upcoming US Non-Farm Payrolls and Unemployment Rate reports on Friday should provide a clearer gauge of these market expectations and the potential medium-term direction for both the US dollar and gold.

In the event that the 1085 support level and the pennant pattern are unable to hold, a breakdown could send the price of gold tumbling down to the next major support levels at 1045 and then 1000, which is both an important psychological level as well as the 261.8% Fibonacci extension of the noted rebound earlier this year.

To the upside, any significant oversold bounce from the current support may invalidate the pennant pattern, but should be limited to the upside by the 1142 prior support level, which may now be considered a major resistance level.

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