John: Over the last 3 trading sessions we’ve seen Gold plummet from $1,416 to as low as $1,330 at a time when global markets have been in some turmoil. There are numerous concerns including the debt situations of Ireland, Portugal and Greece, the raising of interest rates in South Korea, the threat of more monetary tightening in China to curb inflation, and the increase in the relative value of the U.S. Dollar. All have had an impact on the price of the yellow metal. Today, Gold (continuous contract) opened at $1,361, rose to its high of $1,365, then fell to a low of $1,330 before recovering to close at $1,339 for a loss of $21.50 (-1.58%). What’s the Gold chart telling us right now?
Looking at the 6-month daily chart, we see that in the last 3 days Gold has lost $75 an ounce and today’s low bounced off the SMA(50) moving average which is providing bullish support. Also shown is a divergence between the RSI and the price (mauve converging lines) which gave a warning that a decline was imminent. The horizontal blue line is a resistance level at $1,340. This was support until it was penetrated today. The new support level is at $1,320.
Looking at the indicators:
The RSI has crossed below 50% to 45% and sits on the RSI support level (orange horizontal line). The Slow Stochastics shows the %K (black line) at 34% and the %D (red line) at 54% – both are falling fast and there is more room to fall further before becoming oversold.
The StochRSI indicator, based on Stochastics applied to RSI and not price, is more sensitive than the RSI and often used to identify reversals. On the chart are 3 thin vertical lines indicating when the StochRSI crosses above the 20% level and the Gold price reverses to the upside. At the moment the StochRSI value is 0.00, so when it crosses up over the 20% level the Gold price will reverse.
Outlook: The worst of the decline appears to be over and Gold is currently trading in an area of support. We can expect some softness in the price to continue for the immediate future but the chart patterns and indicators show the support is strong at $1,320. I expect this support to hold, followed by a fresh and potentially very powerful advance to begin well before year-end. Sudden and sharp drops such as this can be expected occasionally, and are indeed necessary, in an ongoing major bull market.
