On April 2, and again on April 12, I wrote a blog post titled Precious Metals Meltdown, and How to Manage It. I talked about how gold, silver, and gold mining stocks have been flying under the media radar for over a year, and the fact that they were not catching the attention of traders, investors, and the public anymore. I also said it would take some sharp price action (breakdown or rally) for them to be front and center again on TV, radio, and in newspapers.
But since gold has plummeted 17.5%, dropping from $1600 down to $1320 per ounce with silver and gold stocks falling as well, they are now headline news once again. This move has caused some serious damage to the charts when looking at it from a technical analysis point of view. Below are some basic analysis points that show a new swing trading entry point.
Broken Support — Once a support level has been broken, it becomes resistance. Gold is trading under a major resistance level.
Momentum Bursts – Since the April 15 low, gold has been setting up for another short selling entry point. Remember, the market tends to move in bursts of three, seven, or 10 days, then price reverses direction or pauses. It has now been 10 days.
Moving Average Resistance – Gold has worked its way up to the 20-day moving average, which can act as resistance.
Bearish Inside Bars – This type of chart pattern points to lower prices. When there is a big down day followed by three, seven, or 10 up days inside the price action of the down bar we can typically expect another sharp drop which tests the recent lows (as shown with the arrow on the chart).
Gold Short Selling Conclusion
In short, gold is setting up for a low risk entry point that should allow you to profit from lower gold prices. The Deutsche Bank AG DB Gold Double Short ETN (NYSEARCA:DZZ) or even the gold mining stock inverse ETF Direxion Shares Exchange Traded Fund Trust (NYSEARCA:DUST) could be played. These funds go up in value as the price of gold falls.
While I expect gold to pullback, I do not think it will make another leg lower. Instead, I expect a test of the recent low or pierce of the low by a few bucks, then a reversal and the building of a bullish basing pattern before going higher.