The level that confirms gold's next leg down — or flips it | XAUUSD Oct 20

Hi, I'm Daniel, an active prop trader. Today my bias on gold is bearish. Last time, I was watching for a reversal at the Tokyo session low and at the previous daily candle's low, but price broke out to the downside through both of those levels, and since the time of my last video, we've seen a drop of roughly 640 pips.

Right now, the broader downtrend is still intact. If price breaks out below this recent bullish reversal candle, this one right here, I think there's a high chance the decline continues further, as it triggers the stop losses of traders who bought the bull flag. So today, I'm focusing on whether this downtrend keeps going, or whether price reverses from that recent bullish reversal candle and turns higher, and that's what I've covered in today's analysis.

Alright, let's jump right into the daily chart. As of yesterday, the previous daily candle had closed as a bearish doji, so I explained that for the day as a whole, price was in a situation where it would likely form a trading range. And the key levels that were easiest to use as reference points were the previous day's high and the previous day's low.

Sorry, let me correct that. That's the shape I was describing earlier. In the end, yesterday's daily candle was still a bearish doji, but its body broke clearly and decisively below the previous low, so from a daily chart perspective, my bias has now turned bearish.

Going forward, you could also argue that this move has just completed, but if we see a breakout below the low and then the pullback back up to that level completes, I'd want to consider a short position at the daily level. And the reason I'm saying that is, here, while the downside follow-through was continuing, price formed a large, strong bearish candle and then shifted into a sideways trading range. First of all, a sideways trading range tends to resolve more often in the direction of the original trend rather than reversing.

And if you look at the price action after this sideways trading range formed, overall volatility has been contracting, so we can judge that the odds of a breakout are rising more and more as that volatility keeps shrinking over time. Also, if we check each of the small price action moves inside this sideways trading range, there's no case where, after a bullish reversal candle, the upside follow-through lasted more than two days. Here too, one reversal candle, then another, and follow-through only the next day before failing.

Same here: a single strong bullish reversal candle, then the follow-through failed. Meanwhile, downside follow-through has lasted three days even recently, and even this bullish doji was negated the very next day, so looking at it in relative terms, clearly the bears clearly have the upper hand right now in terms of the balance of power. So ultimately, as for which way this trading range breaks out, at this point I still see the downside as the more likely direction.

With that in mind, let's move on and take a look at the 1H chart in more detail. The red line on the chart I'm showing here marks where the 1H chart was at the moment I did yesterday's live stream exclusively for Trading Lab members. As for what kind of analysis I gave at that point, here on YouTube I'll narrow it down to the key points and walk you through them as we go from here.

First, in terms of bias, at the time of the stream you could say we were in the middle of a downswing, so I told everyone the bias was to the downside. However, you had to be careful with the shape of the daily candle, because, as I mentioned earlier, the daily chart had just formed a bearish doji candle right before that. So basically, the flow for the whole day was likely to turn into a trading range.

That meant watching the Tokyo session low, which I believe was around 4165 dollars. Yesterday's Tokyo session low was somewhere right around here, if I remember correctly. So we had this area as one key level, and then also the previous day's daily candle low, which is 4147 dollars.

Where exactly is 4147 dollars? The 47 level is right about here on the chart. So in yesterday's analysis, I explained that we should keep in mind, as a basic premise, that a bounce was quite likely to happen around these price levels.

Then, looking back at the price action just before that, the move from here to here on the chart can also be read as a trading range. So I pointed out that, after this, the Tokyo session low, which was also acting as the lower boundary of this range, was an especially likely spot for a rebound, since buyers often defend that kind of level. So basically, rather than jumping straight onto this downswing right away, I said I wanted to confirm the price action at each key level first and see how buyers react there before committing to any trade.

If the bounce at that level succeeds, then of course you should consider setting up a long position there. But as I've told you many times, inside the structure of a strong trend, a reversal candle that forms against the trend often leads to a great entry. So after one bullish reversal candle formed, I explained that it's better to place your short below the low of that bullish reversal candle rather than buying it.

And since the stream before last, in other words since last Friday, I've been explaining the whole sequence of price moves in our Trading Lab community as usual, including the reasoning that led up to each scenario analysis. So what exactly did I explain? Since the last stream, it's been about the price action that unfolded right after that.

First, at the London open, price formed a bullish doji, and on bar 2 it broke out to the upside, but it failed to get follow-through, and on bar 4 it printed a bearish reversal bar. After that, the downside follow-through continued into the second bar after the New York open, and from the New York open, using that as the low, price tested the highs with a strong rally all the way up to bar 3. After that, on bar 4, price broke out to the downside below the low of that bearish reversal bar, and the downside follow-through continued into the close, so last Friday's New York session ended up as a trading range overall.

Since we had a trading range into the close, the bounce off the lower boundary of that range came right at the Tokyo session open. At the Tokyo open, price first tested last Friday's New York session high, then turned lower to set a fresh low, and after that it clearly formed a higher low and climbed again, moving up in what you could call an ascending trading range pattern, grinding higher step by step. Looking at that whole sequence of price action, the Tokyo session never made a big break of either its highs or its lows, so the trading range simply continued.

Then came the London session open, where price formed a bearish pin bar and afterward went back to test that same high once again. Here, for the first time, price printed a bearish trend candle, completing that reversal pattern right at the London open. From that flow, you could also read it as a breakout below the earlier ascending TTR, the trading range we'd been watching.

So at that point I explained that price is now inside a downward swing, and our bias is to the downside. On the other hand, the same trading range has been in play since the end of last week, and with ranges, in practice you'll usually trade better if you assume they'll keep holding rather than break. Right then, the previous day's daily low lined up with the Tokyo session low, so I said we should stay alert for price bounces at each of these key levels.

Against that backdrop, gold did end up showing clear bounces at each of those key levels, and you can see it playing out right here on the chart. Price put in a low at this point and bounced once off it. Then after that, we got to this area right around here, so let's take a closer look at what happened next.

Around here, price did bounce again off a low, but the very next candle completely negated that clear bullish reversal candle. That's a failed follow-through, and price then broke lower with a clean candle that was easy to ride, so sellers could catch it comfortably. So in the end, the bullish reversal at this key level got rejected, which set up a really solid short entry setup.

In this case, price dropped about $64, roughly 640 pips, into the most recent low. That played out almost exactly as our scenario predicted. Today, in the stream for Trading Lab members, I break down the scenario ahead using these three points.

The Tokyo session ended in a range, but given the bigger-picture downtrend, my bias is currently bearish. In short, ranges tend to break out in the direction of the original trend. If this latest bounce breaks down, I'm watching for the selloff to pick up again.

Look at this bullish reversal candle right here. If price goes on to form higher lows after it, my first concern is a trading range taking shape. We've seen up moves and down moves with the same momentum, so first, be alert for a range forming rather than a clean trend.

And only if the breakout comes to the upside would I need to switch my bias to bullish here. Right now, price hasn't invalidated this bullish reversal candle, but we haven't seen any follow-through buying either, so we're stuck in a small sideways range. There's about 10 minutes left on this 1H candle, and I'm watching closely to see how it closes from here. That's all for today's gold update.