At 12:44 GMT, XAUUSD is trading $4793.49, down $101.94 or -2.08%.

The Next Battle Zone: $5002 to $5144

If we assume the new range is $5602.23 to $4402.38 then we expect to see the intraday rally extend into its retracement zone at $5002.31 to $5143.89. Traders will have a serious decision to make if this area is tested — whether to initiate shorts or play for an upside breakout of the zone.

The first leg down from a major top is usually long liquidation. After this is completed, the next move typically retraces 50% to 61.8% of the break. If this market is headed lower then aggressive shorts will come in on a test of the retracement zone at $5002.31 to $5143.89. If this zone is taken out then new buyers may take a shot at the record high.

Essentially, stopping at $5002.31 to $5143.89 will signal the presence of sellers, while taking out $5143.89 will signal the return of buyers.

Speculators Need to Step Aside — Real Buyers Need to Step In

A resumption of the rally would not be my ideal situation because it would suggest the return of speculative buyers. Ideally, I would like to see a support base form a little above the 50-day moving average. Building a support base would suggest the presence of real buyers.

What Really Caused Friday’s Selloff?

Fundamentally, I believe the long-term narrative is still bullish, but speculators drove the market too high, too fast over the short-run. Some traders want to blame Kevin Warsh’s nomination as the next U.S. Federal Reserve Chair for Friday’s steep sell-off, but I believe it may have been a combination of this and Wednesday’s Fed monetary policy statement that offered nothing as to the timing of the first rate cut of the year. Add in the margin hike by the CME Group and you get a mass liquidation that may have taken out all of the weaker longs.