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Gold Heading Towards Critically Overbought Territory

Commodities / Gold & Silver Mar 02, 2008 - 10:24 PM GMT

By: Clive_Maund

Commodities Best Financial Markets Analysis ArticleWith silver being in a critically overbought state and looking set to react very soon, we now have to “find reasons” for gold to react on its charts, since it is hardly likely that gold will continue higher while silver is reacting. Fortunately, if we look closely enough, it is not hard to find reasons for gold to react soon along with silver.

At first sight everything looks “ship shape and Bristol fashion” on the 1-year gold chart. The fine uptrend continues and it is not showing very obvious signs of being at an overbought extreme. However, if we look more closely, we can see that the RSI indicator at the top of the chart is just starting to move into critically overbought territory, although it can rise to higher levels as the recent past demonstrates. Similarly, the MACD indicator while not at the overbought extremes of recent months, is also not far off. What all this means is that while gold is not at the same kind of overbought extreme as silver, it is not so far off as it first looks.

Another factor pointing to a possible reaction soon is that gold is now only about $10 - $15 below the inner channel return line shown on the chart, currently at about $985 - $990, and should it succeed in running to this channel line in coming days it can be expected to trigger selling as the price will be approaching the potent psychological $1000 level, which will automatically bring out a wave of profit taking. Taking all these factors into consideration it is easy to grasp why gold may soon react along with silver. How far might it react in the event that silver reacts back to the $17 - $18 zone?

Bearing in mind that it might first run at the channel line in the $985 - $990 area as already mentioned, it could react back to the $900 area, although it is likely to stop and turn up again before this level is reached. In the $900 area we have strong support from earlier trading, the support of the 50-day moving average, and a little below and rising all the time, the underlying support of the intermediate uptrend line, so it is considered unlikely that it would drop below this level. A near-term reaction by both gold and silver would be expected to coincide with a bounce in the dollar which is substantially oversold after its recent breakdown and plunge.

On the long-term 8-year chart it can be seen that although gold can be expected to react short-term along with silver, the intermediate uptrend in force following the breakout above the resistance shown is likely to carry it to the upper steeper channel return line before it has run its course, and given the dollar's recurring bouts of weakness there is a good chance that it will run considerably beyond this as gold's larger uptrend may continue to accelerate against the dollar. However, this trendline may nevertheless serve as a guide to where the intermediate uptrend is likely to top out, especially as we are at a point in the gold/silver cycle where silver really makes the running, as it tends to perform best in the final stages of a gold uptrend. Long-term the trend of both gold and silver remains up, of course.

By Clive Maund

© 2008 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

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