The price of gold of XAU/USD in the commodities market could be due for a correction in the near term. As you can see from its 4-hour chart above, gold has rallied nicely after hitting a low of $1,308.200 per ounce on January 28, 2011 after reaching a high of $1,423.69 on the first trading day of the new year. Gold was able to rebound from the said low and is now trading at $1,356.11. Using the high on January 3 and the low on January 28, gold has retraced all the way to its 50% Fibonacci retracement level. For the last 5 days, gold attempted to move above this level but it was not able to do so. Notice also that during this period, it has traded within a rising wedge which technical analysts consider as a bearish formation (a rising wedge represents a rally in prices). Therefore, a failure to break above the 50% Fibonacci retracement level and a breach of the wedge’s support could send it back to its former low near $1,310.00.
Over the longer term, however, it appears that the gold bulls remain to be in control of the driver seat. An upside breakout from a continuation inverted head and shoulders pattern way back in October 2009 eventually pushed gold past its target. If you remember, gold had tiptoed around $1,400.00 for the most part of November 2010 to January of this year. Despite a likely weakness in the short term, gold’s uptrend line would most likely support its fall and even push it back towards its recent highs. As long as this uptrend line does not buckle, the long term bias for this precious metal remains to be bullish. Moreover, a presence of a bullish hidden divergence, where the price registers higher lows and the stochastics mark lower lows, suggests a probable pick up its in price in the coming week or so.