Hawaii Six O - Gary Wagner
Death cross signals potential for lower pricing in gold
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
For the first time since January 2020, the 50-day moving average (green line) crossed below the 100-day moving average (magenta line), illustrated on today’s chart labelled as “C”. This is commonly referred to as a death cross. Most frequently the term is about when the 50dma crosses below the 200dma. However, it can be used as a term to describe whenever a shorter-term moving average moves below a longer-term one.
In the middle of January at the start of 2020 is the last time we had these averages cross back (item “A” on the chart) into a bullish alignment, (shorter above longer) when the 50dma moved above the 100dma. This correlation remained for the monumental rally lasting eight months that eventually brought gold to its all-time high. the differential between the two averages remained approximately $60 as they rose in unison for nine straight months. In the last week of September 2020, the difference between the two averages reached its widest distance of almost $100 (chart example B). The widening between the two occurred after gold was on its way down clearly showing how moving averages are by definition a lagging technical indicator. Then in October, we began to see the price difference between the averages contract which led to today’s death cross.
Currently, the 50dma in gold futures is fixed at $1908.70, and the 100dma is at $1910.60. On a technical basis, this is a bearish signal.
According to Investopedia, a death cross is, “a technical chart pattern indicating the potential for a major selloff. The death cross appears on a chart when a stock’s short-term moving average crosses below its long-term moving average. Typically, the most common moving averages used in this pattern are the 50-day and 200-day moving averages.”
The first takeaway mentions that this technical chart pattern has proven to be a reliable predictor of some of the most severe bear markets in the past century including 1929, 1938, 1974, and 2008. However, in the case of these examples of major bear markets in equities, it always is referring to the 50day crossing below the 200day. The opposite of this chart pattern is labelled a golden cross which indicates the potential for bullish price movement.
Investopedia explains this chart pattern signals short-term momentum is slowing, but it is not always a reliable indicator that the bull market is about to end.
“There have been many times when a death cross appeared, such as in the summer of 2016, when it proved to be a false indicator. Those who got out of stocks during the summer of 2016 missed the sizable stock market gains that followed throughout 2017.”
As we mentioned one major caveat to this technical pattern is that moving averages inherently by definition are lagging indicators.
Nonetheless in the case of gold pricing the fact that all three major averages, the 50, 100, and 200-day previously were in a bullish alignment since the beginning of February 2020. The fact that this is the first instance where the short-term moving average has crossed below a longer-term moving average since February of this year is ominous and truly a warning that we could see gold prices move lower.
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Wishing you as always, good trading and good health,