Gold's range trap: what has to break before you short | XAUUSD Oct 19

Hi everyone, I'm Daniel, an active prop trader. Today my bias on gold is bearish. Since the last analysis, the drop out of the channel we'd been watching closely has played out, and heading into the New York session open, price sold off sharply, dropping roughly 431 pips in total.

Right now, the downswing that formed at the London session open is still running, so my base plan is rally selling. That said, the daily chart is in a trading range, so at this stage I want to carefully watch for a reversal off the low printed during the Tokyo session and the previous day's daily low. The key question is whether this downswing keeps going, or whether price reverses from the pullback zone and turns back up.

That's what I focused on in today's breakdown. Okay, let's jump right in and start with the daily chart. So, looking at gold first, the daily candle from the end of last week ended up confirming its close as a bearish doji, a candle with almost no real body.

The candle right before that had formed a bullish reversal pattern, but since this one closed as a bearish doji, the upside follow-through we'd expect from that setup has basically failed to materialize. Also, since it closed as a doji, the first thing we should consider is that a trading range is likely to form inside that doji candle's range. So, if we think about it according to standard theory, for today's daily candle, yesterday's daily high and yesterday's daily low are likely to act as the upper and lower limits of the trading range, and that's what I think we can say here.

Also, regarding how today's daily candle closes, if it forms an inside bar within the previous daily candle and volatility keeps contracting throughout the day, then in that case, we can say the market setup favors a breakout from this doji candle, most likely unfolding during tomorrow's Tokyo session and the London session that follows.

Either way, for today's strategy, we trade the range around this latest doji candle, riding each short-term trend move that forms within that range, taking profit at the upper and lower limits, and if you want to enter a new position from there, it looks like the safer play today is to stick to counter-trend trades, shorting at the upper limit and going long at the lower limit. So that's the kind of scenario I think we can expect in the current market.

Now, let's drop down a timeframe and look at the 1H chart. Late last week, I ran a members-only stream for our Trading Lab community at this red line, around where the second big bullish candle formed after the London session open. That's when the stream went live.

Here on YouTube, I'll walk you through the key points of what technical analysis and trading scenarios I covered in that live stream at the time, so let's keep going. As of the end of last week, at this point on the chart, the uptrend structure on gold had still not broken down. So first, as I told you last week, my directional bias on gold was still to the upside for now.

And looking at how price has moved so far, first let's focus on the price action right around this area of the chart. If we read the move at points like this as an upward spike, then afterward price would typically retrace all the way back toward the starting point of the channel, so I had told you that after this, we should stay alert for a sharp drop as well. In other words, this simply wasn't the kind of uptrend you should just jump into right away.

If we're thinking about short-term key levels based on the most recent price action, first of all, this candle was still unconfirmed at that point, so If price broke cleanly above this doji candlestick, then in that scenario the setup was clearly one where we'd be prioritizing long positions first. That's because if sellers set up on this bearish reversal candle just before, their stop orders would naturally tend to pile up around here, so price could break out right through there and keep extending.

That's what I was thinking. Also, for the upswing that followed, I thought the candlesticks inside that swing were a really critical factor. I'd explained that if the candles kept rising with no overlap and the upward momentum kept getting stronger, the London session would likely turn into what we call a bullish trend day.

On the other hand, a bearish scenario like this one was also quite possible at that point. So what kind of bearish scenario? Basically, it's one where price forms a so-called three push up pattern or a wedge, then turns into a sharp drop.

That's because, if we look back at the uptrend up to this point, price never once tested the upper edge of the channel line we drew from the initial reference point, and it's somehow been held back, stalling well below it. Now look back at the bearish reversal bar that pushed down to take out the low. At that point, this bar still hadn't closed yet, but after printing a first and then a second so-called climax bar, price dropped straight down with no overlap at all between the candles.

On top of that, here too, even though there was no downside follow-through afterward, despite forming bars with such strong momentum, price only edged its highs up narrowly, and from that we can say that from here, the bearish scenario is that price could form a wedge, a three push up pattern. I explained that we should gauge momentum from the size of the bullish candle bodies and whether the candles overlap, and stay alert for signs of the rally losing steam.

Now, with that scenario in mind, I also walked through the whole sequence of price action inside Trading Lab. So where did I start the review from? It's this candle right here.

I'm going back to the candle at the London session open one day earlier, and working forward. As for the London session open, price formed a small bearish doji there, and given how the candle bodies kept getting smaller, I was reading it as a bullish reversal candle at that time. And sure enough, on the very next candle, this doji broke out to the upside.

Right here we get a big bullish marubozu candle. It closes strong, and the next candle extends the three-push thrust up before forming a bearish reversal bar here. After this bearish doji candle forms, the very next candle tries a breakout to the downside, but then, one more candle after that, this one didn't get any bearish follow-through to the downside.

Instead, it printed a long lower wick, which is basically a second test of the lows right here, and from there, price went on to make a higher high. From this point on, since both buying pressure and selling pressure were strong in both directions, with neither side in full control, conditions favored a weak uptrend, what we call a trading range uptrend pattern, likely continuing. The New York session opened with a bullish doji candle, and then, after price tested the recent high, it formed another bullish doji as an inside bar.

Here, price tested the bottom of the range, then formed a small doji candle at that range low. If it were me, I'd enter a long just above this doji's high. After that, the upside follow-through continued, but the upside breakout failed.

Price got pulled back inside the range, and once a bearish doji formed near the lows, we can connect the two lows and draw a channel line. From that doji, a strong bullish candle broke out to the upside, then a bearish reversal bar formed and the follow-through failed again, yet price had turned to higher lows. That was the price action as of our live stream.

Looking at the whole sequence, the most recent bars look like a spike, and this part here could also be read as a channel trend. That's where we stood. So how did the market move after the stream?

Price did keep making higher highs, but each candle is now completely overlapping the one before it. That's bullish momentum losing steam. Once it printed a clean, easy-to-spot third bearish reversal candle, that completed a textbook three push up pattern.

Price then came back to test the low where the move started, and just as our scenario called for, we've confirmed it dropped a full 43 dollars, or 431 pips. So today, in the stream for Trading Lab members, we've broken down our scenario around these three key points. The recent downswing is still going, so for now our bias is bearish.

But the daily chart is in a trading range, so on the downside we're watching for a reversal at key levels. That's how we see it. Will the decline continue, or will price bounce off the bottom of the trading range?

That's our focus. I've explained the specific price action criteria in detail inside Trading Lab. Let's check the real-time chart again.

On the 5-minute chart, the reversal is gaining strength, and it keeps looking like a falling wedge. But for now, price hasn't broken above the wedge's upper edge and is still consolidating. As for the Tokyo session low, since the daily chart is still in a trading range, it's likely to act as a key level.

So for the remaining 40 minutes or so, I'd like to wait for the 1H candle to close. That's all for today's gold analysis.