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Gold Is Oversold But Selling May Continue After A Short Pause

 February 22, 2013 12:33 PM

After a year and a half of sideways action and a bombardment with promises of new highs by analysts of all kinds, gold investors are frustrated and are selling. Especially annoying to them is the fact that SPY is up 4.9% while GLD is down -4.8% YTD. This is a net loss of about 10% for investors in GLD who have listened to bull analysts and were convinced that gold would rally to new highs while stocks would plunge towards their 2009 lows.

In a recent post I wrote that GLD "may test the December 20, 2012 support level at $158.39? and that the "scenario of a test of the lower horizontal line of the channel at $148.27 is becoming more probable at this point." GLD closed at $153.33 yesterday but it is now in oversold territory with the RSI(14) at 25.53:

[Related -Perfect Storm Driving Gold Higher]

It may be seen that prices are now close to the lower trend line of the down-channel  and near support at $153.61. There have been only 11 other occasions when the RSI(14) of GLD dropped below 26 since its inception on November 18, 2004 and 8 of them are clustered in August 2008 and May 2012. A backtest for short signals generated when the RSI(14) drops below 26 and for profit target and stop-loss of 4% generated 5 trades with 4 winners and one loser:

[Related -SPDR Gold Trust (ETF) (GLD): 3T Analysis: Target $1,400 but Box Bound]

This is a small and not statistically significant sample of course but it does provide some information. It appears that GLD is about to rebound but this may provide an opportunity for more selling and eventually a test of the critical support level near $148.50. It further appears that the current move has diminished any chances of a rally in gold prices to new highs and that is a only remote possibility at this point.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

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