Gold Price Setup Ahead of US CPI: Bear Flag Hints at Further Downside
The US economy is slowly but surely losing steam and the Fed’s monetary tightening efforts are becoming increasingly futile. Hence, the CPI is expected to continue cooling in the coming months.
Ahead of this week’s US inflation data release, market participants are expected to continue speculating about what the outcome may be and where gold prices could move from here. While there is a clear bias towards an upward surprise in this month’s US inflation print, the fact that the USD has rallied in response is likely to keep gold prices under pressure going forward.
Bear Flag Hints at Further Downside
Gold prices are currently trading slightly lower after a sharp sell-off this morning. The price is now trading slightly below $1,800 an ounce after dropping over 1% this morning. A daily close below the key support level at $1,880 could see the precious metal retrace back to Friday’s low at $1,865.
However, the decline from this point is not necessarily a sign of the price falling further into the “bear territory” that some have suggested. Instead, it could be a sign of the bulls taking control and driving the price higher again.
The next key technical indicator that could help the bulls push the gold price to new highs in the short term is the Relative Strength Index (RSI). If RSI were to break above its 50-day moving average, it would signal that a strong momentum shift has occurred and that the trend is headed further up.
Meanwhile, a bearish RSI is a key indicator that reflects the deterioration in underlying economic activity and suggests that prices are about to fall again. If a bearish RSI breaks below its 50-day moving average, it could trigger a reversal in the short-term.
Another technical indicator that could help the bears push the gold price lower again is the US 10-year bond yield. The benchmark US yield is firming up to 5-week highs as investors await this week’s inflation data release which is expected to dictate the next direction for risk assets.
A bear flag is a pattern that can be formed by a price decline that has been followed by a consolidation phase and then a breakout to the upside. This is a common pattern that is used by many traders as it offers trades with promising risk-reward ratios.
Traders can also look to use the bear flag as a trend following indicator when they see a strong drop in price and high volume into the decline. This is a sign that the market is not as oversold as it was earlier in the day and that buyers are ready to take advantage of the situation.
In the past, bear flags have often been followed by a consolidation phase in which the price is trading within a narrow range between two parallel lines. The retracement that forms the flag can be as long or as short as you want, but the most important thing is to watch for the price to break out above the upper end of the consolidation channel. This is a great way to confirm the pattern