How Close Are We to the Final Bottom in Gold?

By Przemyslaw Radomski, CFA  FEB 22, 2013 11:57 AM

RSI levels indicate an oversold situation, and the outlook for gold from here is bullish.

 


The gold roller coaster seems to go on and on without an end. But what we have seen this week was more of a bungee jumping. However, at this time, there seems to be no more room for further declines, as major support lines have been reached already or are about to be reached. Does this mean that we are close to the final bottom and that a strong rally will emerge soon? Let us jump straight into the technical part of today’s essay to find out – we’ll start with the yellow metal’s long-term chart. (Charts courtesy of http://stockcharts.com.)


Click to enlarge

The most interesting point in this chart is not that prices moved to the long-term support line and reversed, but rather that the current RSI level, based on weekly closing prices, is the most oversold that it has been since the beginning of the bull market and is now more oversold than after the 2008 plunge.
 
This is a huge deal. Even based on the above alone, the bottom could be in for gold prices. Since the long-term support line has been reached, the medium-term bottom is probably in, and prices are likely to rally in the months ahead. It seems that perhaps a major top will be seen close to mid-2013.
 
Let’s see how the situation looks like from the non-USD perspective.



We continue to see a somewhat bullish picture here. Extensive consolidation has been seen after the 2012 breakout. Gold moved below the declining support line this week. While the situation looks a bit discouraging, we expect the recent breakdown to be invalidated – likely today.  The support line currently in play has held declines for several months now with only one previous quick dip below it, which was invalidated towards the end of 2012.
 
Now, let’s take the Canadian dollar perspective, which yields yet another encouraging analogy with 2008.



In this chart, we see that prices are now below the trading channel, much the same as was seen in 2008. That move was followed by a strong move to the upside, and with the situation heavily oversold here today, we expect prices to move back into the trading channel and rally sharply as we saw in 2008. Note the extremely oversold RSI levels (see the red arrows in our chart).
 
Summing up, support lines are in play for two out of three of this article’s gold charts. It’s likely that a local bottom has indeed formed. Additionally, RSI levels indicate an oversold situation. The outlook for gold from here is bullish.
 
Thank you for reading. Have a great and profitable week!

For the full version of this essay and more, visit Sunshine Profits' website.

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