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Oversold gold will regain ground
Colin Abrams
Posted: Thu, 22 Jun 2006


[miningmx.com] -- WITH the dollar gold price having dropped below the $600 per ounce level, the question is where will it find support? Fortunately its chart provides an answer. We also look at a chart of the silver price, which has had a phenomenal run this year. It is also correcting right now, and we consider where it too will find support. The current state of the precious metals markets prompts the question of whether their bull run in is over or not. Indeed, the charts of both gold and silver show their prices heading towards support levels, from where they’re expected to resume their prior bull trends.

GOLD PRICE ($) – becoming oversold

Trend: Short-term down, but oversold.
Strategy: Buy the gold price on a close above line 2.

Chart 1. (Daily)

Click on image to enlarge

  • Having broken below line 1 support ($602), the gold price is heading rapidly towards its closest support level, which is $575 on the spot price. This level is the 78.6% Fibonacci retracement (a natural support level) of the March – May rally.
  • If the price pushes through $575, closing below it for two consecutive days, it will then retrace all the way down to the 200-day moving average at $545/$550.
  • The daily Relative Strength Index (RSI, on top) is entering the oversold level, which is typically a sign that the price will rally very soon.
  • Therefore, buy the gold price on a closing price above line 2 resistance. Line 2 is at $595 on Monday 19th June, and falling at an angle of $4.00 per day thereafter. Place your initial stop-loss as a close below the low formed before the breakout above line 2. Then look for a re-test of the $726 May high. The bigger picture points to an eventual re-test its early-1980s high of $850.

    SILVER ($) – nearing its target

    Trend: Short/medium-term down. Long-term up.
    Strategy: Sell short with caution, then prepare to buy.

    Chart 2. (Daily)

    Click on image to enlarge

  • The silver price has formed a medium-term head and shoulders pattern (labelled S-H-S), and is heading rapidly to its minimum downside target of $9.88 per ounce, spot price (measured as the height of the head and shoulders projected down).
  • Interestingly, this target coincides with the 200-day moving average, which typically provides support.
  • The Relative Strength Index (RSI, on top) is becoming oversold, which means that a rally is likely to begin soon.
  • For now, the strategy is to sell short on bounces towards line 2, but with caution. (Line 2 is at $11.00 on Monday 19th, and falling at an angle of $0.10 per day thereafter, to $10.90 etc). Take profits on shorts at the target ($9.88). The stop-loss for shorts is a closing price above line 2. When the price does eventually close above line 2, buy to go long for a rally to re-test its May high of $14.95.

    For more recommendations and charts by the author on SA and overseas stocks, indices, and currencies, please go to www.themarket.co.za