How to Identify a Bearish Reversal in Gold Trading

28 בדצמ׳ 2024

In this article, I will explain to you 4 efficient strategies to identify a bearish reversal with technical analysis in Gold trading.
You will learn price action, SMC and technical indicator strong bearish signals.

First, let me remind you that different bearish signals may indicate a different magnitude and a degree of a potential reversal.

While some signals will be reliable for predicting short term reversals, some will be more accurate in projecting long-term ones.

One more thing to note is that one of the best time frames for bearish reversal confirmations on Gold is the daily. So, all the cases that will be explained will be on a daily time frame strictly.

XAUUSD Bearish Reversal Signal 1 - Bearish Price Action Pattern.

One of the perfect indicators of the overbought state of a bullish trend on Gold is bearish price action patterns.

I am talking about classic horizontal neckline based patterns like head & shoulders, inverted cup & handle, double/triple top and descending triangle.

Typically, these patterns leave early bearish clues and help to predict a coming downturn movement.

A strong bearish signal is a breakout of a horizontal neckline of the pattern and a candle close below.

The price may continue falling at least to the next key support then.



Above is the example of a head and shoulders pattern on Gold, on a daily. Its formation was the evidence of the overheated market. Bearish breakout of its neckline confirmed that, and the price continued falling.

Bearish Reversal Signal 2 - Rising Channel Breakout.

When the market is trading in a healthy bullish trend, it usually starts moving with the boundaries of a rising channel.
It can be the expanding, parallel or contracting channel.

Its support will represent a strong vertical structure, from where new bullish waves will initiate after corrections.

Its breakout will quite accurately indicate a change of a market sentiment and a highly probable bearish reversal.



Look at this rising parallel channel on Gold chart on a daily. The market was respecting its boundaries for more than 3 months.
A bearish violation of its support was an accurate bearish signal that triggered a strong bearish movement.


Bearish Reversal Signal 3 - Change of Character & Bearish Price Action.

One of the main characteristics of a bullish trend is the tendency of the market to set new higher highs and higher lows. Each final high of each bullish impulse is always higher than the previous. Each final low of each bearish movement is also higher than the previous.

In such a price action, the level of the last higher low is a very significant point.
The violation of that and a formation of a new low is an important event that is called Change of Character CHoCH.
It signifies the violation of a current bullish trend.

After that, one should pay attention to a consequent price action, because CHoCH can easily turn into just an extended correctional movement.

If the market sets a lower high and a new lower low then, it will confirm the start of a new bearish trend.



That is the example of a confirmed Change of Character on Gold on a daily. To validate the start of a new bearish trend, we should let the price set a lower high and a form a bearish impulse with a new lower low.



Bearish Reversal Signal 4 - Death Cross.

Death cross is a strong long-term bearish reversal signal that is based on a crossover of 2 moving averages.

On a daily time frame, it is usually based on a combination of 2 Simple Moving Averages: one with 50 length and one with 200 length.

The signal is considered to be confirmed when a 50 length SMA crosses below 200 length SMA.

It is commonly believed that it signifies that the market enters a long-term bearish trend.



On the chart, I plotted 2 Moving Averages. When the blue one crosses below the orange one, a global bearish trend on Gold will be confirmed



The 4 bearish signals that we discussed will be useful for predicting short term, mid term and long term bearish reversals on Gold.
While price action patterns will indicate local bearish movements, Death Cross will confirm a global trend change.

Learn to recognize all the signals that we discussed to make more accurate trading and investing decisions.

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