Gold made a bearish engulfing candle on August 7th, which was followed by a severe 3 day sell off. Gold has traded in a sideways range ever since and is forming a symmetrical triangle pattern. The size of the potential breakout is equal the the size of triangle pattern from point 2 to the bottom of the range, which is roughly 140.60 points. We take this distance and apply it the the point it breaks either the downward sloping trend line for an upside breakout or to the the point it breaks the upward sloping trend line for a downside breakout. We would need a close above/below the trend lines for the pattern to be valid. Also, the breakout needs to occur before 9/25, otherwise it gets to far into the apex of triangle. This lowers the probability of the pattern. The big question is whether it breaks to the upside or the downside?
Case for the upside:
- It has found support at the 50 DMA (yellow) during this consolidation, which is bullish.
- It has found support inside the 34 EMA wave during this consolidation, which is bullish.
- It has 8:13:21 EMA alignment, which is bullish.
- The trend before this consolidation was bullish, which increases the probability of a continuation pattern.
Case for the downside:
- October is traditionally a seasonal weak period.
- The lackluster response to the recent FOMC meeting.
- The most recent benchmark candle, from 8/11, is bearish and acting as stiff resistance.
Conclusion:
Gold looks poised for a breakout and I think the probability favors the upside. This market still has directional bias the the upside. However, let the pattern decide which direction. Whichever way it does go, it should offer a chance to re-enter on a pullback. Options might be a good play here.
