Yesterday we focused on the fact that, for the first time since January 2020, the 50-day moving average of gold futures broke below the 100-day moving average. This death cross suggests that there may be a pause in the current gold rally. This is further evidence pointing to the decline in precious metal prices since they hit all-time highs just over a month ago.
Since the end of January, we have seen the three main moving averages in full bullish formation. This means that the longest time cycle (200 days) of the different moving averages is less than the intermediate time cycle (100 days), and it is lower than the shorter term moving average (50 days).
It was in February of this year that we moved the three-stroke cycles into the bullish formation we talked about above. That’s when the short-term (50-day) moving average broke the 100-day moving average. This chart pattern is called a golden cross and signals that the momentum of the short, middle and long cycles is strong. This in effect indicated that we should expect higher prices than we actually got.
All three moving averages remained in this extremely bullish configuration until yesterday. This was the first time since January that we have seen the shortest 50-day AD drop below 100-day AD. This created a graphic pattern called a cross of death. The reason it is labeled as such is that when the short-term moving average goes below a long-term moving average, it looks like the shape and sense of the skull and bones, carried on ships as a message warning of the death and destruction of all who come near.
In essence, this chart pattern can indicate the transition or pivot from a bull market to a bear market. The market technician uses this chart model that takes place in three distinct phases. In the first phase of this chart pattern, a stock or commodity is in a definitive uptrend. Techs are looking for signs that market prices have reached some kind of high as buying momentum begins to contract. This causes prices to drop and is the first sign of a transition in which the bull faction (buyers) loses control of the bear faction (sellers).
The second phase occurs when the price drop is strong enough to move the shorter-term moving average below a longer-term moving average. This is the actual cross of the short-term moving average falling below a long-term moving average. The final stage occurs when market forces lower prices and selling pressure continues. This is a key part of the full model as the downward momentum needs to be sustained rather than short-lived.
Market technicians use other tools and indicators to confirm the strength of this pattern. Most often, traders and market technicians use trading volume as an indication of the strength of the pattern. If this pattern occurs during a period of high transaction volume, it is considered a more reliable pattern. The rule of thumb is that the higher the volume of transactions, the more reliable the cross of death. Traders also use a variety of momentum indicators such as the MACD to decipher whether the cross is indeed a sign of continued damage to the chart.
Currently, this chart pattern has completed both phase 1 and phase 2. It is the continuation of the downtrend in the coming days that will determine the strength and validity of the signal.
At 5:15 p.m. EST, the most active December contract is currently trading at $ 14.10, down 0.75%. If gold continues to trade under the pressure of falling prices and trading volume increases, the likelihood that this is a valid chart pattern grows.
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Wishing you, as always, good trading,
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