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Is the Gold Rally Over?
May 11, 2011 | 4 comments
The Gold market is on the precipice of a decline whose scope and breadth shall catch many traders and investors by surprise; and very flat-footed. The reason for the decline is simple: it shall be a delayed reaction to the end of “quantitative easing part II” or better known as QE-2. Liquidity is leaving the market as precious metal futures margins are increasing – leading those under capitalized or over-exposed traders to protect their profits and account balances via liquidation of long positions. The question is “how long” and “how deep” a correction shall be, and to that end we’ll use a weekly Gold chart to illustrate our thoughts.
First, we should note the overriding pattern is a bearish wedge, of which prices remain at upper trendline resistance. If trendline support is violated, then this shall cause a great deal of technical selling. Second, last week formed a bearish key reversal to the downside, which means the highs are sacrosanct and shall not be approached for a number of weeks. Lastly, the 21-week RSI touched above the 70-level. This is typically an overbought condition, and in the past we’ve seen prices weaken once the RSI has broached the 70-level and fallen back below as at the current time. Collectively speaking, these bearish developments all argue for lower prices.
So having noted this, we should look for major support levels to be tested, and perhaps in some cases violated. The first such level is the rising 30-week moving average, which crosses at $1407 – still far below current levels. This level has held prices 7-times since the breakout above it in late-2008; therefore it is considered a rather “important support” and should hold any decline…at least initially. However, if this level is violated, then we can make a strong case that the rising 150-week moving average will be the next major level of support. Certainly there are other various minor support levels prior to this level being tested; but the fact of the matter is that the risk-reward is weighted to the downside for the time being. And one should trade accordingly.
Richard Rhodes is the founder of Rhodes Capital Management, Rhodes Trading Group, and The Rhodes Report a macroeconomic and stock trading newsletter. The Rhodes Report seeks an absolute return through a long short strategy that trades equities, ETFs, and inverse ETFs that offer the greatest potential for positive portfolio returns in both bull and bear markets.
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