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Articles and Commentary

Gold Sell-Off -- Now What?
By Willem Weytjens
August 25, 2011

After reaching an all-time high well above $1,900 earlier this week, gold is now about $180 lower just two days later. We have been saying more than once that we should expect these kind of volatile moves in a parabolic end phase. The difficulty of parabolic moves is to guess when it pops and to get a chair before the music stops playing because when it pops -- and it always does at some point -- the move down is very violent like we have seen over the last two days.

As we can see in the chart below, price tagged the 20-day Exponential Moving Average (20EMA) yesterday and held at the close. Next support would be the 20-day Simple Moving Average around $1,740 followed by the 50EMA at $1,662 and about $1,585 (the lower bollinger band), the 100EMA, and the April/May high.

The RSI should now hold above 50 in order to remain bullish. The MACD will most likely make a negative cross but that doesn't necessarily mean that the uptrend is over.

Chart courtesy stockcharts.com

If the price would hold around current levels we might see the uptrend resume pretty soon and then this move down was probably a move to shake out the weak hands. Sentiment was too bullish a couple of days ago, as can be seen in the following chart.

Chart courtesy sentimentrader.com

After two days of panic selling we can expect sentiment to be headed in the other direction now.

The fact that bothers me is the lack of participation of the mining stocks in the recent rally. We have been saying this in several articles on our website, including Back to the Future: Gold, JPY, DAX, Paulson, Crash?!? and HUI: Gold vs. Bank of America

One can argue that gold mining stocks are severely undervalued and I agree, based on lower oil prices, and record high gold prices, but technical indicators don't look all that positive.

The Negative Divergence between the price of the HUI index and the RSI is also confirmed by a lower top for the MACD. The HUI index seems to be forming a head-and-shoulders pattern. The last two times price pierced the upper bollinger band, it failed to hold these levels, and that meant the start of a severe correction. Will this time be any different?

Chart courtesy stockcharts.com

You can now try out our services during five days for only $5. That's only $1 per day!

Have a profitable day.

Willem Weytjens

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