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Simple Technical Analysis Of Gold

March 19, 2016

Gold seems to be on a tear for the past few months…so I thought maybe it’s time to come out of hibernation and take a look at it.  As old timers might remember, I come across from the purely technical discipline…and more specifically I try to keep things at a very simple level.  I have long learned that simple works, but not all the time, of course.  No technique works all the time.  Simple works often enough to make trading with its results profitable most of the time.  And times when it fails, it gets you out with minimal damage (that is if you act on its message).

Today, I’m just going to briefly take a look at where gold is and make a very brief comment on gold stocks in general.

Today’s candlestick gold chart shows the recent daily action along with a short (red) and intermediate (blue) term moving averages and an intermediate term RSI.  Among the things I look for to denote trend are moving averages while the RSI is used to detect if the trend is getting stronger or weaker.

I’m normally an intermediate term kind of guy…although I do watch the short term and occasionally the long-term.  One of my intermediate term positive indicators of trend is when the short-term moving average line is above the intermediate term line.  This occurred during the second week of January and the short-term has remained above ever since for a positive intermediate term trend.  I also like to have the trend confirmed in my mind. Consequently, I look for the slope of the intermediate term moving average line to turn to the up side.  This confirmation came during the third week of January.  One should wait for a trend reversal confirmation as an extra risk reduction factor.

Once you have determined the price trend, you would need to know if such trend is improving in strength or not.  My indicator to determine the momentum of the price trend is the RSI.  Since I am concerned with the intermediate term, the RSI therefore reflects the intermediate term momentum.  Since early December this RSI (albeit in the negative zone) has been steadily improving -- and is finally moving into its positive zone in the fourth week of January.  With a positive trend confirmation, one would act on an improving RSI -- and not necessarily wait for it to move into its positive zone.  However, for extra caution and continuing reduction of risk, one would wait until both the trend and RSI are positive.  You may not lose much potential profits…but you might just sleep a little sounder.

Well, that was then…but what about now?

After a nice two month rally, gold seems to be in some difficulty now.  It is still nowhere near reversing into a negative trend. However, it is showing signs of a rest period ahead, or maybe even a short price decline.  There are three simple warning signs of possible trouble ahead.

First, we have the short term moving average line topping out and even reversing direction.

Secondly, we have an upward sloping pennant or flag pattern.  These upward sloping pennants most often break on the down side.

Thirdly, we have a negative divergence between the actions of the RSI and the price.  The price has made new rally highs a couple of weeks ago, while the RSI has not been able to keep pace and ended lower than it was during the mid-February peak.

Putting these three warning signs together does not confirm any reversal of trend, but they do indicate a warning that now is not the time to be on the buy side.  One would wait for these warning signs to be nullified before acting on the buy side.  As for the sell side, we do have a negative trending RSI…but the moving averages have not yet crossed to give us that signal.  Wait for the crossing.

What we have looked at here are a few of the simple indicators of trend and trend reversal.  Future articles will make use of other simple indicators one can sometimes make use of.  There is no need to go fancy to understand the markets.

Gold stocks have been on a real tear these past few months with gains of 100% and 200% not unusual.  I maintain an Index of the top 100 gold and silver stocks trading on the North American markets, based upon market value at the time of last revision.  What the Index shows is that the stocks reached an overall peak in the past week or two -- and are now in a slight downward motion.  The percentage bullish/bearish ratings are still very, very bullish but becoming less so.  Again, a sign that now is not the time to be on the buy side.  Risk is increasing.

Visit me on my Facebook page at https// for other tit-bits of market comments and technical information.  I’m just starting the page but hope to be including individual stocks as well as Indices and commodities. A brief bio has been posted today for those who do not know me.

Merv is a retired Aerospace Engineering consultant.  He is also a retired market technician with over 40 years of market experience and research.  Merv received his certification as a Chartered Market Technician (CMT) in 1992. Developer of many technical techniques and programs which he has been using in his previous Technically Speaking with Wil-Arm and Technically Precious with Merv commentaries posted throughout the globe.  Developer of several gold and silver Indices, Merv continues to update his Merv’s Gold & Silver 100 Index and Merv’s Penny Arcade 50 Index and reviews them during his periodic on-going Technically Precious commentaries. 

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.
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