Time for a Golden Update! Time to check out XAUUSD! How has been Gold progressing since our last article?
Well on the week chart nothing much has changed folks. We are making lower lows on this time frame and after weekly engulfing bearish candles, we could expect a continuation of that down move sometime soon. A move down to the next Fibonacci retracement level which is the 786 could be a likely move. A continuation deeper, back down to the bottom of the wedge, is also an option that cannot be ruled out. Now that we have a flavor for the weekly direction, let us zoom in to the day chart for more clues!
The day chart shows a clear down trend with lower highs and lower lows and no sight of any bullish divergence. We can see that there is plenty of space to the targets at double bottom (high probability), to the -0.272/-.618 targets and the bottom of the wedge.
On the 4 hour chart we can see that the XAUUSD has crawled to the upside in a very corrective manner. In this up-trend Gold was certainly making higher highs and higher lows, but all in all the move up was slow and corrective compared to the impulsive drop prior to it. Also, we never broke the bigger day down trend channel so a bearish sentiment was still lingering in the air.
The 4 hour higher highs and higher lows of course could be well represented by a lower trend line connecting the bottoms. This neatly boxed in the price action of the up move and the break of that uptrend channel signaled the start of a switch of gears to the downside.
That break of the uptrend channel was impulsive and quick, similar to a knife cutting through butter. Will this knife get rough on the edges, or will we see it continue with cutting through support in similar fashion? Let us zoom in and get our analysis cap to dissect this commodity.
On the 4 hour chart we are able to see that the down move has ended its bear run. The bulls have wrestled back control and posting bullish 4 hour candles to the upside. This move was to be expected because if we zoom into the 1 hour chart, we are able to clearly distinguish 5 waves down. We therefore can expect a Wave of a higher degree to be finished and can look for an ABC correction back to the 500-786 Fibonacci retracement area of the recent impulsive swing high swing low on the 4 hour chart. This would complete a Wave 2 and we would have an impulsive Wave 3 ahead of us.
One method of trading this setup is by placing an order at the level of the Fib retracement. This carries more risk than the 2nd option which is to wait for price action confirmation by anticipating candle stick reversal patterns (4 hour chart is the best time frame for that) in that 500-786 Fib area. Once we see a pin bar formation, a first small entry could be made in the anticipation of the next lower low. For the safest entry we need to see Wave C be completed. The trade on the potential pin bar could be entered by taking a retrace of the wick and/or by entering the break of the low.
Of course, our EW count might have some faults. Our “lines in the sand” are the following: if the top of Wave 1 is broken, then the down trend is invalidated and the count is different.
However, once the bottom gets broken, we have a reasonable statistical chance that Wave 3 is on its way. This could be another place for an additional sell. Of course as an intra-day trader, you might already have had scale-in opportunities. The stop would depend where the last swing high swing low top was placed and on which time frame. Here is a great article from Nathan if you have some questions which time frame you want to trader.
The mentioned trade plan allows for multiple scale-ins at various spots, which thereby mitigates the need of putting the risk of the entire trade at one spot and one price. The advantage of this method is that a trader loses small when the trade is not acting as they want. However they have the opportunity to add to the winning trade once the trade is developing in their favor. Of course taking profit is just as an important and you might want to read this article on trailing stop versus hard take profit for more information on that topic.