Gold has been weathering some considerable selling pressure lately, which has naturally turned sentiment quite pessimistic. Bearish commentary abounds, with all kinds of predictions for further declines. But as is usually the case after any material selloff spooks traders, gold’s technicals are actually very bullish today. Gold’s next move will likely prove to be a major rally.
Gold’s latest selloff started on February 29th when the Fed Chairman’s testimony before Congress convinced traders that a third round of quantitative easing is becoming less likely. Gold plummeted 5.1% on this latest in a long line of irrational QE3 scares, its biggest down day since the stock panic. Over the six weeks since, gold has retreated as much as 9.3% at worst (including that initial plunge).
Of course gold’s day-to-day price action has felt weak during this selloff, sparking plenty of fears, anxiety, and worries in the hearts of speculators and investors. But as always in the markets, the tyranny of the present deludes traders into foolishly missing the forest for the trees. Perspective is crucial to maintain, as keeping current events properly framed within longer-term context short circuits the perilous emotions of greed and fear.
This essential context is easily obtained with charts. While the past several days’ gold action dominates psychology, odds are it isn’t even relevant over a longer time horizon. For my own trading, I generally use six months or so to keep my own emotions in check. I don’t worry about any daily selloffs (or get excited about any daily rallies) until a move persists for long enough to actually be material on a six-month chart.
And though I’m looking back several years in this essay to illustrate gold’s bullish technicals today, the principle remains the same. Gold has been beaten down to very favorable buying levels within the context of its post-panic bull-market uptrend. Traders who can overcome their fears and fight the worried crowd to buy gold and gold stocks at these cheap levels will almost certainly be richly rewarded.
This first chart looks at gold’s technicals superimposed over a powerful sentiment indicator I call Relative Gold. Based on my simple and very profitable Relativity trading system, it considers gold as a multiple of its own 200-day moving average. Over time this rGold metric (gold’s close divided by its 200dma) forms a horizontal trading range. When rGold slumps to low oversold levels, it is a fantastic time to buy cheap.
Let’s start with basic gold technicals, which are easy to understand. Bull markets trend higher, usually in uptrend channels. These are defined by the lows and highs carved by the underlying price. When connected with straight best-fit lines, the periodic lows delineate support while the highs show resistance. In any trending market, you want to buy near support. When prices hit this lower boundary of their uptrend channel, they are as cheap as they’re likely to get as long as that bull remains alive and well.