Credit: Shutterstock photoThursday June 20, 2013 1:43 PM
(Kitco News) - Gold futures need to claw their way back above some kind of corrective high before the market can technically break its recent downtrend, says a technical analyst.
One such level would be if the market can reclaim $1,376 an ounce, the high from Wednesday before the metal extended the decline from this spring, said Dave Toth, director of technical research at RJ O'Brien & Associates.
Back on April 11, Toth told Kitco News that gold could "collapse" on accelerated selling if prices were to break through a cluster of significant lows from roughly $1,535 to $1,524, dating back to September 2011. His prophecy came true in the next few trading days as the acceleration through this area carried the most-active futures all the way to the low $1,320s.
Prices subsequently bounced, but rallies faded and the price action ended up becoming largely lateral during the time since. As it did so, this meant increased odds of a market consolidation rather than an upward reversal, Toth explained Thursday. And as it consolidated, this meant an increased risk of a resumption of the downtrend, he said.
"Well, that other shoe dropped today, with the market breaking below both the May and the April lows," Toth said. This reaffirmed the technical downtrend from a peak back in October and the record high back in September 2011, he explained.
The market previously had "pretty good support" in the $1,321-$1,336 area, which failed overnight, Toth said. After such sell-offs, technicians are often asked where the next significant support lies.
"Right now, there really isn't any," Toth said. "The question one should ask is 'what does the market have to do to negate this downtrend.' The answer to that is absolutely clear and specific. It has to recover above the recent corrective high. And that high, in its tightest form, is $1,376."
This was the peak for most-active August gold futures on Wednesday, prior to the next leg lower that came in the wake of a meeting of the Federal Open Market Committee and ensuing press conference by Chairman Ben Bernanke.
"That ($1,376) is the specific and closest level this market now needs to recover above to jeopardize the integrity of this clear and present downtrend," Toth continued. "Until the market can recover above that level, or a subsequent corrective high like that yet to be determined, this trend is down…."
Toth listed two Fibonnaci retracement and progression points of interest to traders. On a log-scale chart of weekly closes only, the $1,300 level is the 38.2% Fibonacci retracement of the rally in weekly closes from October 2008 ($718) to September 2011 ($1,877). Toth also cited $1,233. This would represent a decline from the October high of $1,798 that would be 61.8% (another widely followed Fibonacci progression level) longer than the previous initial sell-off from the 2011 high of $1,923 to $1,523, Toth explained.
Still, he said, these levels are "absolutely not" chart support in the present downtrend.
"The only thing that matters in a downtrend is a momentum failure or bullish divergence of momentum," he said. "We know exactly what the market has to do to provide that - and that's get above $1,376. Until then, there's really no saying how low this thing could go."
Meanwhile, Toth pointed out that sentiment indicators have reached historically low levels, which often foreshadow potential major turns in any market.
For instance, the 59% low two weeks ago in his firm's bullish sentiment index for gold - which is based on Commodity Futures Trading Commission data on positioning of managed-money accounts - was the lowest since June 2007, Toth said. Further, he said, the Bullish Consensus reading put out by Market Vane Corp. fell to 40%, which was the lowest level since May 2001.
"I fully expect such pessimism to warn of and accompany an eventual base and reversal in this market," Toth said. "However, an absolutely critical component of that analysis…is that the sentiment indicators are not applicable tools…in the absence of a confirmed bullish divergence in momentum. This market can stay down and those sentiment levels could be more and more depressed."
Once again, he emphasized, the market has to show a signal that the downtrend is abating, such as a move back above $1,376.
"Then technical factors like Fib relationships and sentiment can contribute mightily to a reversal prospect," Toth said. "So it all boils down to momentum right now at this point. Every other technical tool and support prospect takes a back seat to that. We know where (declining) momentum becomes a factor - that's above $1,376."
Read the latest news in gold and precious metals markets at Kitco News.
By Allen Sykora; asykora@kitco.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
