Over the last two weeks, we witnessed a $70 decline in gold prices, all without a single bounce.
This move is enough to knock the courage out of any gold bug. It is also significant enough to encourage short-term speculators to consider going short the yellow metal by selling COMEX futures or buying puts.
But here’s something to consider: is it the time to take a contrarian approach, that is, for short-sellers to cover and for prospective gold buyers to jump in?
Today, gold just bounced off its long-term trend line (1). The Relative Strength Index (RSI), an indicator used to gauge overbought and oversold levels, is giving us an extreme oversold level at (1a). You can see similar activity during the December 2016 gold correction (2) wherein the RSI reading reached an equivalent oversold reading at (2a).
As you can see, the price of gold began trending steadily upon bouncing off the December line.
So, if your stance toward gold is bullish, the current price bounce might be signaling a continuation of its 2-year uptrend.
If your stance is bearish, or if you are short, the current bounce might be warning sellers to lighten their load or exit their positions until evidence of a downtrend continuation materializes.
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