Gold Forecast: Violent Friday Reversal – Was That the Top?

Gold Forecast: Violent Friday Reversal – Was That the Top?

Gold Key Points

• Gold reached nearly $4400 during today’s Asian session before gradually, then suddenly, dropping all the way down to just above $4200.
• The fundamental factors driving gold’s rally haven’t changed over the last 20 hours, and we haven’t seen any significant technical damage yet.
• Traders may be back in “buy the dips” mode when they come back from the weekend.

Yesterday, my colleague James Stanley covered the parabolic move in gold, noting that “The trader’s option set in such environments isn’t great, but it largely revolves around the choice as to whether they should chase the move and risk getting caught buying a top, or wait for a pullback that may never arrive. The downside of each is fairly clear, however, as the former involves a loss of capital while the latter is only a loss of opportunity. I think with experience, most trades will side with the missed opportunity cost because with patience, more opportunity will arrive, while lost capital is gone forever.”

It's an immortal dilemma for traders, and today’s price action demonstrates the risk of arriving late to the party. The precious metal reached nearly $4400 during today’s Asian session before gradually, then suddenly, dropping all the way down to just above $4200 as of writing. From a fundamental perspective, there weren’t any obvious catalysts for the reversal; softer US trade rhetoric toward China may have boosted hopes of a trade deal later this month at the margin, but those have not (yet) been meaningfully reciprocated on China’s side.

Instead, it’s more likely that sentiment and leverage got so extreme that an incremental shift toward profit taking ahead of the weekend metastasized into a nearly $200 intraday reversal, which is always an elevated risk in one-way markets.

Of course, today’s move has many traders wondering, “Was that the top for gold?” While we don’t have the benefit of hindsight, the factors driving gold’s rally (pervasive uncertainty, fears of debasement, the ongoing US-China trade war and US government shutdown, low and falling real yields, etc) haven’t changed over the last 20 hours. At the same time, gold is still trading higher by nearly 6% on the week, meaning little in the way of technical damage (yet), despite the large intraday move. Therefore, the odds still favor continued upside in my view, with traders still keen to buy the yellow metal on any near-term dips.

Gold Technical Analysis: XAU/USD Daily Chart

Source: StoneX, TradingView

Aligning with the above analysis, the chart shows that gold has still not even tested the short-term 8-day EMA that has served as support throughout this latest bullish thrust. That dynamic level of support sits just below the $4200 level and would have to be breached before traders seriously consider the prospect of even a one-week correction. Below that, the rising 21-day EMA near $4,000 could provide strong support if we do see the first significant gold pullback in months.

As always, the evolving technical picture will guide where the balance of probabilities lie, but the lack of significant technical damage or fundamental shifts so far may put traders back in “buy the dips” mode when they come back from the weekend.

-- Written by Matt Weller, Global Head of Research

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