Gold may be setting up for a big breakdown

Technical Analysis

Author: Adam Button | gold

Gold technical analysis

Gold is down for the third consecutive day and trading close to the middle of the range that's been established since mid-February.

What that masks is several failures to break higher despite a generally weak US dollar and dovish central bank shifts.

Technically, a major head and shoulders top may be in the process of forming after Monday's rally faded. If the neckline breaks, it could target a move back to the low $1100s.

In addition, the May-July period is one of the softest stretches of the year, seasonally, for gold.

The risk?

If I were to flip the trade, what's the bullish case? I struggle to find good reasons to buy. The market is pricing in only a 15% chance of a Fed hike in June so even if that doesn't happen, there isn't much fuel left to burn.

If the US dollar were to weaken further, that might be a catalyst but how much currency strength will the ECB or BOJ tolerate?

There is always the chance of risk aversion but I don't see it as a particularly great safe haven trade.

Perhaps the best thing for gold bulls would be some kind of turmoil in China but Beijing has worked hard to stimulate the economy and the latest trade data showed a strong rebound in exports.

The trade

I like selling gold around $1240 with a stop at $1285 and a target at $1120. The risk-reward ratio is certainly right. It's probably best to take half of it at $1240 and sell the rest on a break of $1207.

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