(Kitco News)- Gold futures have fallen tolevels that suggest an “oversold” market in the near term, yet technicallyoriented traders would still like to see some chart sign of a reversal higher.
One measure that traders watchto see if the market has absorbed too much selling - meaning potential for atleast a short-term bounce - is the Relative Strength Index. As of Wednesdaymorning, this stood at 17.23, the lowest level in about a year. A reading below30 is considered oversold.
Charles Nedoss, seniormarket strategist with LaSalle Futures Group, commented that gold is “getting alittle oversold here” and may be close to a bottom. Still, he would like to see“some kind of outside day” to feel more confident that better days are ahead.
An outside day to the upside occurs when any marketinitially trades below the prior day’s low, then reverses and closes above theprior day’s high. This is generally seen as a sign that a market’s near-termmomentum may be changing.
Comex Augustgold has traded as low as $1,255 so farWednesday. Nedoss put chart support near $1,251.90, the multi-month low hitback in December.
Suppose the market trades below this, triggering sellstops, which are pre-placed orders activated when certain prices are hit. Thensuppose the market reverses and closes above the previous day’s high. Thatwould be helpful as a sign of a potential reversal, Nedoss explained.
“That could prompt some short covering,” he continued,referring to buying in which traders exit short trades in which they werebetting on further price declines.
However, to feel more confident that the market is in factregaining its footing, Nedoss then would like to see August gold move backabove the 20-day moving average around $1,287.50.
“A close above that would negate some of the bearishforces,” he said.
Even better, he said, would be if the U.S. dollar index didthe same in reverse, since gold often moves inversely to the U.S. currency. TheSeptember dollar index did in fact post an outside day to the downside fourdays ago, Nedoss pointed out. First, it traded above the previous day’s high andthen closed below the previous day’s low. However, the contract has notremained below its 20-day moving average of 93.887.
By Allen SykoraFor Kitco News
Follow @AllenSykora