Technically Speaking

Think about all those western tourist traps where vacationers in their khaki shorts and sunburned noses are handed a pan, directed to a manmade river, and told "There's gold in them there hills!" All you have to do is dip the pan into the water, scrape up some of the gravel, and swirl everything around while the gold settles to the bottom. Then as the bleached out-of-towners go stumbling off on their quest, the locals sit back with a smile, knowing they are the only ones getting rich that day.

Now take a look at June gold's weekly chart. Gold is sinking fast and has yet to find the bottom of the river, or the pan, falling more than $100 during the overnight trade. The posted low of $1,385 looks tentative at best, despite the fact that early Monday morning sees the contract trading back above $1,400.

Why the sharp sell-off? Technically, it looks like it can be traced back to two weeks ago when the most active June contract dipped below its series of previous lows near $1,556. That week saw the contract fall to a low of $1,539.40 before posting a modest rally to close at $1,575.90. However, last week showed that any thoughts of a bullish revival were premature as the market fell hard to a weekly loss of $74.50.

But that was just the tip of the iceberg heading into this week. Investment traders continue to flee the market, leading to an overnight loss of $116.40 through early Monday morning. Also notice that weekly stochastics have done little during this collapse, quietly dipping back into oversold territory below 20%. Given this sloth-like behavior it could be another week or two before stochastics show an attempt at establishing a bullish crossover, with the faster moving blue line crossing above the slower moving red line with both below the 20% level.

When this occurs, and if gold settles in near the $1,385 bottom, then initial upside price targets for a possible uptrend seem as far away as the nearest chain coffee house to the aforementioned city-dwelling greenhorns. As the chart shows a 33% retracement would take the contract back to $1,524.20, though the recent consolidation phase saw most of the trade occur between $1,544.70 and $1,594.00, the 38.2% and 50% retracement levels of downtrend from the high of $1,803 (week of October 1, 2012) through the much discussed possible bottom.

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