Bear Flag Break Spells Trouble for Gold Prices

Rallies in gold continue to be met by sellers at an important resistance level. With the break lower from a bear flag, gold prices are at risk of extending the correction.

Gold 4-Hour Chart

Gold prices have seen some wild price action with tensions between the US and Iran driving the yellow metal above $1600 earlier this month for the first time in nearly seven years.

Since then, precious metals have pared gains. On the larger time frames, gold shows signs of exhaustion and a potential for a reversal. At the same time, the upward momentum seen since the summer cannot be ignored. Often, when a rally accompanies the type of momentum that gold displayed in the second half of 2019, fake reversal signals emerge.

But the technical charts, at least on the smaller time frames, seem to provide evidence that the yellow metal is not ready to continue its prior rally. At least not yet.

A notable horizontal level at $1562 has been capping the upside since last week, aside from a brief, unsustainted attempt on Monday. The level is considered significant as it was responsible for holding gold prices higher between 2011 and 2013 on a monthly chart. Further, a bearish flag pattern has emerged and gold has broken lower from it. The pattern began forming last Monday and the breakdown occurred on Tuesday of this week. There has been a recovery attempt since the break lower, but the $1562 level has once again proven to hold sellers, capping the recovery.

Gold 4-Hour Chart

Aside from gold prices, silver is showing signs of turning lower as well. We recently issued a bearish trade setup for silver. Although the recovery in silver was a bit stronger than anticipated, resistance at $18.11 held and prices have since fallen to near a one-month low. This provides support to our tactical near-term bearish view.

On the fundamental side of things, there does not appear to be anything urgent that would support upward price pressure in precious metals. The US-Iran dispute appears to be all but forgotten, especially when looking at the rally in equities. The outbreak of the coronavirus appears to be contained to China and a select few neighboring countries. Thankfully, the virus was identified early and has not escalated into something much bigger. It’s too soon to say it’s fully contained, but for now, the impact on precious metal prices appears to be minimal.

The markets will shift their focus to the ECB meeting later today. Most analysts do not expect much will come out of the meeting. Bloomberg published an article yesterday stating that there might be a revision to the way policymakers look at their inflation targets which might cause some volatility in the markets.