The XAU/USD pair closed higher than opening yesterday as the bulls gained some strength on media reports saying that large speculators and hedge funds started recovering their short positions recently. As a result, gold prices broke out of the consolidation area which we have been watching for days. After trading between the 1587 and 1564 levels for several days, a breakout was imminent. The pair broke through the resistance zone at 1587 and touched our first target (another resistance) at 1597.77. The pattern on the daily chart and the recent price action suggest that we seem to have more pressure from the bulls than bears.
On the 4-hour time frame, we see that the XAU/USD pair is trading above the Ichimoku cloud. In addition, the Tenkan-Sen line (nine-period moving average, red line) is above the Kijun-Sen line (twenty six-day moving average, green line). From a technical point of view, it looks like we are getting ready to test the next important resistance at the 1604 level. If the bulls manage to clear this strong resistance, with little in the way offering resistance, we could see gold prices hitting 1625.64. However, since there are so many forms of resistance lining up together in that area, I believe it will be a tough nut to crack. To the downside, the key level to watch will be the 1587 level. If the bulls fail to climb above the 1597.77 and the direction changes, 1587 will be the first key level for bears to conquer. If we close below this level, prices may retrace all the way back to 1570 or even 1564.
