Despite the bullish setup on the gold monthly chart, a bullish breakout remains elusive. However, the Bollinger band study (20MA, Std. Dev. of 2) indicates the breakout will likely happen soon.
Monthly chart
Gold rose to four figures (above $1,000) in March 2008 and since then the gap between the upper Bollinger band and the lower Bollinger band has ranged from $760 (March 2014) to $194 (November 2017). As of writing, the gap is $203, meaning the Bollinger bands are 57 percent narrower than the long-term average of $477.
Also, the gap has been below $210 since September 2017, meaning the yellow metal has witnessed consolidation for almost five months. An extended period of consolidation is usually followed by a big move on either side. It is likely it would be a bullish breakout as indicated by the long duration charts.
- Read - Gold risk reversals retain long-term bullish bias: XAU/USD 12-months 25 delta risk reversals show XAU calls (buy gold) remain firmly bid.
Further, the macro factors also support gold. The US 10-year treasury yield confirmed an inverse head and shoulders breakout earlier this month, signaling an end of the multi-decade bull market in bonds. This, coupled with fears of faster Fed tightening could send the 10-year well above 3 percent this year.
The rising treasury yield is usually USD bullish (and gold bearish). While this may be true, the rising yield environment could spook the equity markets (as seen earlier this month). It is widely believed that equities could suffer another round of sell-off once the yield finds acceptance above 3 percent. The resulting haven demand could boost gold prices.
Hence, the metal will likely see a convincing move above the upper Bollinger band in the next few months and could rally towards $1,450 before the year-end.
- Read - Goldman Sachs raises gold price forecasts
Week Ahead - Focus on the key trendline
As far as next week is concerned, the focus is on the trendline sloping upwards from the Dec. 12 low and the Feb. 8 low.
Daily chart
- The metal has defended the trendline support this week. However, only a close above 10-day MA (currently seen at $1,339) would open doors for a re-test of the Jan. 25 high of $1,366.
- On the other hand, a close below the ascending trendline could yield a sell-off to 100-day MA of $1,300.
- A daily close below $1,300 would signal bullish invalidation.
- On a larger scheme of things, a convincing break below the December low of $1,236.45 would signal a long-term bullish-to-bearish trend change.
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