Divergent trends in XAU/USD and XAG/USD

Gold, XAU/USD, Silver, XAG/USD – Technical Outlook:

  • Gold is attempting to break below key support.
  • Silver is looking for direction after this month’s rally.
  • What is the outlook and what are the key levels to watch for a trend reversal?

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Spot gold is testing key technical support, a break below it could signal further weakness in the coming months. It is attempting to break the key horizontal trendline support at 1,676, which coincides with the 200-week moving average. Although it closed below support on Thursday, given the importance of support and the frequency with which it has been tested since 2021, it might be prudent to await two weekly closes below support before completing Thursday’s move as a valid break.

A decisive break of the four year moving average could have repercussions not just for a few days, but possibly weeks/months. In terms of levels, a drop below the horizontal trendline would trigger a double top pattern (2020 and 2022 highs), suggesting a possible pullback towards the 200-month moving average (now at around 1292). Still, there is fairly strong support at 1,620 (the 50% retracement of the 2018-2020 surge), followed by 1510 (the 61.8% retracement).

To be fair, the bearish break is undecided. There is a possibility that Thursday’s move was a false break prompted by position adjustments ahead of next week’s crucial meeting of the Federal Reserve’s FOMC rate-setting committee. Silver experienced a similar false break earlier this month. The first sign that gold’s break was wrong would be to erase Thursday’s losses and close above 1,676, increasing the likelihood of a move towards the 12th September high of 1,735. A break above 1735 would then likely turn the bias from bearish in favor of range trading conditions in the meantime.

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XAU/USD weekly chart

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The failure to take losses after breaking below key technical support earlier this month, coupled with positive divergence on the daily and weekly charts, suggests that silver could settle in a range in the short-term.

For the week ended September 2nd, silver closed below support at the July low of 18.11. But even though the price made a new low, the Relative Strength Index (RSI), a measure of momentum, failed to follow. A new price low coupled with weak momentum often indicates that bears lack strength, increasing the likelihood of a false breakout.

Similarly, the daily chart’s RSI formed a ‘higher low’, referred to as positive divergence (with the price), despite silver making a new price low on September 1st. The following week, silver recouped the previous week’s loss and subsequently rose above minor resistance at the late August high of 19.40. For range trading conditions to turn bullish, silver would need to break above the resistance area including the 200 week moving average, the 21.40 horizontal trendline and the 20.86 August high. On the downside, a decisive break below the 17.53 September 1st low would be a sign that silver has resumed its medium-term downtrend.

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XAG/USD daily chart

XAG/USD daily chart

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— Written by Manic Jaradi, strategist for DailyFX.com

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