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Is the downward correction in gold over?

Gold rebounded on Friday after Fed chair Powell’s remarks; however, the drop to a six-week low could be a sign that cracks have started to emerge in gold’s uptrend and what is the outlook and key levels to watch in XAU/USD?

Source: Bloomberg

Last week’s drop to a six-week low could be a sign that cracks have started to emerge in gold’s uptrend. To be sure, it doesn’t mean ‘down’ is the only way forward - it probably means that the top side is now more or less defined.

XAU/USD slipped below a crucial floor at the mid-April low of 1970 – a fall below a vital price pivot for the first time since the rally began in early November – suggesting that the tide could be beginning to turn against gold. That is, the trend could be changing from up to sideways or down on the daily charts.

Given the pace and the extent of the gains since the end of 2022, and still-supportive upward momentum on higher timeframe charts, it could well be a sideways with a downward bias, rather than a unidirectional slide -- and Friday’s rebound reinforces this point.

XAU/USD daily chart

Source: TradingView

Gold rebounded on Friday after US Federal Reserve Chair Jerome Powell left the door open for a pause at the June meeting. Tighter credit conditions mean that “our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell said.

The central bank chair reiterated that the central bank would now make decisions “meeting by meeting”. Markets are pricing in an 90% chance of a pause at the June FOMC meeting.

XAU/USD 240-minute chart*

Source: TradingView

On technical charts, the trend varies depending on the timeframe of reference.

On the intraday charts, XAU/USD’s trend has turned bearish – see the 240-minute colour-coded candlestick charts based on trending/momentum indicators. Hence, Friday’s rebound could run out of steam ahead of the tough barrier around 2005-2020 (including the 200-period moving average and the mid-March high on the 240-minute charts).

XAU/USD 240-minute chart

Source: TradingView

On the daily charts, as the colour-coded candlestick charts show, the trend has moved to a consolidation phase within the overall bullish structure. If history is any guide, consolidations can extend from a few days to a few weeks.

So far, XAU/USD is holding above the key converged cushion area of 1925-1950 (including the 89-day moving average and the lower edge of the Ichimoku channel on the daily charts). A break below could trigger a reassessment of the six-month-long bullish structure.

In recent months, the momentum on higher timeframe charts has been a concern - see previous updates on March 28, April 24, May 10, and last week’s update “Is This the Moment of Reckoning for Gold?”, published May 17.

XAU/USD daily chart*

Source: TradingView

*Note: In the above colour-coded charts, blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Note: Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, or around a support/resistance and/or in sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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