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Strategist: 'Oversold' Gold Market Seeking Signs Of Reversal

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(Kitco News) - Gold futures have fallen to levels that suggest an “oversold” market in the near term, yet technically oriented traders would still like to see some chart sign of a reversal higher.

One measure that traders watch to see if the market has absorbed too much selling – meaning potential for at least a short-term bounce – is the Relative Strength Index. As of Wednesday morning, this stood at 17.23, the lowest level in about a year. A reading below 30 is considered oversold.

Charles Nedoss, senior market strategist with LaSalle Futures Group, commented that gold is “getting a little oversold here” and may be close to a bottom. Still, he would like to see “some kind of outside day” to feel more confident that better days are ahead.

An outside day to the upside occurs when any market initially trades below the prior day’s low, then reverses and closes above the prior day’s high. This is generally seen as a sign that a market’s near-term momentum may be changing.

Comex August gold has traded as low as $1,255 so far Wednesday. Nedoss put chart support near $1,251.90, the multi-month low hit back in December.

Suppose the market trades below this, triggering sell stops, which are pre-placed orders activated when certain prices are hit. Then suppose the market reverses and closes above the previous day’s high. That would be helpful as a sign of a potential reversal, Nedoss explained.

“That could prompt some short covering,” he continued, referring to buying in which traders exit short trades in which they were betting on further price declines.

However, to feel more confident that the market is in fact regaining its footing, Nedoss then would like to see August gold move back above the 20-day moving average around $1,287.50.

“A close above that would negate some of the bearish forces,” he said.

Even better, he said, would be if the U.S. dollar index did the same in reverse, since gold often moves inversely to the U.S. currency. The September dollar index did in fact post an outside day to the downside four days ago, Nedoss pointed out. First, it traded above the previous day’s high and then closed below the previous day’s low. However, the contract has not remained below its 20-day moving average of 93.887.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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