XAU/USD Analysis: Weekly Bullish Break is Wave 5 of Wave 1

6 min read

Dear Traders,

Nenad and I love trading the Forex market, but we also follow other financial markets such as XAU/USD (Gold).

Gold is in a strong rally at the moment and you might be wondering whether the bullish trend can last or whether a larger reversal will occur.

Today’s article will review the market structure and wave patterns for multiple Gold charts. First we start with the higher time frames to get a sense of the larger structure before moving on to current events. (if you prefer our video analysis of this article, please scroll to the bottom).

Long-term Direction: Bullish

XAU/USD has been in a bearish correction for almost 6 years but the overall trend remains bullish. Why?

The bullish momentum saw the price increase with a factor of seven in just twelve years. Gold was $250 at the end of the year 1999 and reached $1900 by end of 2011. There are only two options that are able to explain this spike:

  1. Wave 3 (dark blue)
  2. Wave C (light blue)

The wave 3 is the most likely scenario due to two factors:

  • The large distance that wave 3 has travelled.
  • The strong Awesome Oscillator bars.

This means that the bearish retracement of the past 6 years is a potential wave 4 (blue). Here are more clues to support the wave 4 pattern:

  1. The bearish price action is relatively choppy, slow and corrective when compared to the bullish price movement.
  2. Price has stopped at the 50% Fibonacci of the wave 4 vs 3 which is a typical retracement for such a wave 4.
  3. Gold also seems to have completed an ABC correction (purple).

XAU/USD could therefore be ready for a wave 5 continuation if indeed the wave 4 is completed. What is the trigger?

An important breakout signal is if price manages to push above the resistance trend line (red). This could start the internal wave 3 (purple) within wave 5 (blue). Price is then expected to reach at least the 161.8% Fibonacci target of wave 3 vs 1, if not further.

Failure to show strong bullish momentum during the bullish breakout and reach the 161.8% Fib target is the first sign of a larger and expanded wave 4 (blue) correction. In that case, price could be building a WXY (pink) within wave 4 (blue). Once again, this is not the main scenario at the moment but it’s a valid backup to keep in mind if price moves weak during the breakout.

The Breakout: Now or Later?

XAU/USD is attempting to break the monthly resistance trend line (red). This breakout could lead to the start of a potential wave 3 (orange) of wave 3 (purple), which is the most impulsive and interesting zone to trade for any (wave) trader.

At the moment there are two potential waves 1-2 (purple / orange) because both wave 1 purple and wave 1 orange are showing 5 internal waves too. This is showing bullish market psychology, because 5 waves is impulsive price action.

The main question is now: will the bullish break workout? Will it be able to break the previous top (orange zone) as well? Let’s review the lower time frames.

XAU/USD Expects Retracement First

The XAU/USD 4 hour chart (see above) is showing a sturdy uptrend channel (green/red line). The recent price action was bearish but it ultimately formed a bull flag chart pattern as part of a wave 4 (brown).

The bullish break above the resistance (dotted orange) trend line is now heading towards the previous top and horizontal resistance (orange box). So what are the next steps for Gold? What is the most likely path of least resistance?

The wave patterns for XAU/USD are favouring this sequence of events and expecting:

  1. Completion of 5th wave (brown) of a larger wave 1 (purple) at the previous top
  2. ABC correction (brown) back to the Fibs of wave 2 (purple)
  3. Bullish bounce after wave 2 is completed and start of wave 3

Does the wave analysis seem complicated? We understand, but it’s worth the effort the learn the market structure. Another alternative is to try out our esc.SWAT method which trades the waves without knowing the waves.

Many green pips,

Chris

More info on our ecs.SWAT course and trading system

Twitter: @EliteCurrenSea

YouTube: Elite CurrenSea

Here is the video of this analysis:

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