Markets have continued to move listlessly most of the London morning so far, with no clear direction, and apparently intent on hunting stops. EUR/USDis of particular note, having suddenly dropped in excess of 50 pips in the past hour. Yet, there seems to be no known fundamental reason for this to occur, and thus it seems prudent to assume stop-hunting activity. Nonetheless, it would be foolish to challenge momentum this great, just in case there proves to be a good reason for it. Instead, we will look to gold to hop on a parallel recovery, should this sudden volatility prove false.
We had already noted that there was a surprising potential gold setup short earlier in the week:
Now, with so much increased uncertainty, it seems reasonable to at least hedge any short trades with a lower timeframe long. The argument for a short term long entry is easily evident.
Figure 1: XAUUSD Four-Hourly Shows a Strong Upward Trend
As prices pull back to test support in the form of the channel, we can attempt to set up a Blue Box zone of support that might prove useful for a short term long trade, should prices continue to decline. Of course, they might not, in which case this trade would not trigger.
The hourly chart provides a confluence support in the form of an intersection between the rising line of support and the declining line of support from the flag channel, as drawn. However, there is little apparent wriggle room, as the candlesticks on this timeframe are relatively large when compared to the zone of support. Thus, we will defer to the 15-minute chart for a potential entry trigger.
Figure 3: XAUUSD 15-Minute Chart
Even in the course of writing this article, prices have suddenly declined to activate the 1287.27-1289.16 support zone. We would now require some sort of bullish candlestick pattern, stochastic cross, or even very quick moving average crossover, to confirm an upward trend resumption. If prices fall through the Box and close beyond, then we would cancel this trade setup.
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