Best Course of Action on Gold: Sell

 | Apr 18, 2017 | 8:00 AM EDT
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It's often said that gold rallies on saber rattling. Yet, as the daily bar chart below shows, the rise since mid-March is about to end on the recent rattlings of modern-day sabers, Tomahawk missiles and MOAB munitions.

The most recent big low came in December, after a multimonth slide brought gold down from nearly $1,400 to nearly $1,100. There were no sabers rattling then, only extreme oversold conditions, including sentiment readings of only 4% bulls, price nearly three standard deviations below the 200-day moving average, and an oversold (but bullishly diverging) stochastic, to name a few. These are some of the many components in the decision support engine's (DSE) behavioral finance algorithms that caused it to warn that selling actions were no longer indicated, and that buying actions were. 

When these conditions are met, the DSE highlights the zone of where actions should take place, with shades of green for buying zones and shades of red for selling zones. Notice that the buying zones of December and January have produced rallies, taking price into the pink selling box. The buying actions are no longer indicated, and selling actions are. If gold rises a bit further, into the darker pink sell zone, stronger selling actions will be indicated. 

Drop down to the stochastic pane, below the price chart, and you can see stochastics are also in the pink zone, above 90%. This is where momentum tends to become exhausted, and needs to reset itself by traveling to the lower green zone, below 10%. While prices can continue rising for a bit, this is not the ideal place to be buying. Rather, selling tends to be rewarded here. Buying tends to be rewarded when initiated in the green zone, which is typically eight to 13, but sometimes 21, days out in time. 

What about the yellow box in the middle of the chart? That is how the DSE highlights that the trend under observation is exhibiting corrective motion (motion against the trend at higher degree). This informs us that the rise off the $1,125 low is "countertrend," and should be at least partially retraced. DSE then highlights the zone where the next action decision should occur -- the light green buying oval in the June/July window, around $1,190 +/-$15. 

Without worrying about missiles, MOABs or any other stories about to arrive in the news, the DSE has objectively analyzed the current condition of gold, found it to be at extreme overbought levels, and indicated the proper action at this time -- selling actions only! Therefore, if you are long, sell to lock in profits or to protect against falling prices in the immediate future. If flat, sell to establish short exposure. And, if already short, hold or add to your exposure to prepare for the next empirically objective move -- a decline from the current price levels to the $1,190 zone. 

In addition to this short-term (daily bar) degree of trend, the intermediate-term (weekly bar) degree of trend is as overbought. When short- and intermediate-term degrees of trend are in confirmation, the confidence of the warning (in this case, sell) rises significantly. This condition of confirmation was last seen at the late February peak in gold near $1,260, right before the shiny metal declined to $1,190 within two weeks. The coming decline should be deeper and last longer than the last one, hinting that the March low could be in danger of breaking. 

For updates on this analysis, as well as other trading opportunities, try our DSE Alerts service for free for a couple of weeks, or contract us at support@dsetrading.com.

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