It appears that Gold ( XAU/USD ) has topped at around the $1325 mark and looks like the bulls have run out of steam. Downside momentum now prevails and large retrace is likely, given that 4H, Daily and Weekly charts on gold point to oversold conditions.
I have set up a sell trade on gold with current conditions:
Stop Loss: 1325.00
Take Profit: 1230.00
R/R ratio : 1:12.2
Trade time frame: 1 - 3 months
This represents an 87.76 point potential with a risk to reward ratio of 1: 12.2.
As you can see on the 4H chart, has officially crossed under (i.e bar has closed) and the histogram has entered into negative territory. Coupled with this is the oversold conditions of the and has now crossed below the 70 upper bound line. From purely the 4H chart, a short term sell trade can be undertaken, however there is still some risk for further inclines. Trades on a 4h chart will be tighter as there is obviously less lag in indicators than larger time frames. I consider 4H charts as a minimum safety net for trades on due to their slightly higher profile than FX or indices.
The shows quite clearly that there is divergence at some level on both the and crossovers. This is a robust proxy indicator that momentum in the trend is nearing its completion. It is more reliable than simple cross overs being that the divergence serves as a reversal confirmation (in most cases but especially so on ) rather than a brief pause or small retracement before continuation.
That being said, a trend reversal cannot really be confirmed until the candle has crossed and closed in and . While this provides a good safety net, the indicators may lag a couple of days after an ideal entry and risk rewards ratios drop considerably.
On the weekly chart, has posted a definite close above the 70 upper bound line. in this case cannot really be considered due to the fact that it lags between 2-6 weeks behind , so it provides little use to us.
The significance of a weekly oversold is that the has very little medium - long term gains and a reversal is on its way.
So putting all the time frames together it points to a strong reversal due to the confluence of consecutive time frames highlighting weekness in the current gold trend. So after considering all the information at my disposal, I have confidence in my analysis and I accept the current risk to set up a sell trade on gold .