This past Saturday my Technically Speaking blog post discussed the likelihood of the Continuous Commodity Index establishing a downtrend, meaning the commodity sector in general was nearing a top. The three leaders of the major sectors (corn, crude oil, and gold) were all in technically overbought situations, and either already in newly established downtrends or nearing one.
The more active December gold contract finds itself in the latter situation. While grains (most notably corn and soybeans) and energies have turned down this week, gold has posted a new high for its uptrend of $1,781.80 as it slowly runs out of upward momentum approaching the longer-term target price of $1,802.70.
Weekly stochastics (bottom study) show the contract to be in a sharply overbought situation with both the faster moving blue line and slower moving red line above 90%. The combination of testing longer-term resistance with stochastics at such high levels usually leads to a bearish crossover in the latter in conjunction with some sort of reversal signal in the futures market. In other words, the trend turns down.
Trends generally reflect the flow of investment money in a market. Downtrends indicate money is coming out, usually due to a change in fundamentals or the idea that the market is overvalued and not a good buying opportunity. In the case of gold, one could make the argument for both those scenarios. Fundamentally there is little news, though a possible bullish turn in the US dollar index (see blog post from Friday, September 14) could cool short-term inflation fears. As for being overvalued, the December contract is trading at prices not seen since February 2012 though the major (long-term) trend on the continuous monthly chart remains down.
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