Gold and Silver Coming off Overbought Conditions during Downtrends

by Admin

Awards 2013

Gold  4H chart 7:40AM EDT 4/26/2012


Correction during downtrend: Since I noted a break above a 1403 resistance pivot XAU/USD has been slowly rallying in the context of a correction against the downtrend in 2013 that started in October 2012. You can tell it is a downtrend because the 200-4H SMA is downsloping, and the other moving averages were in bearish alignment until the recent correction caused the lower period MAs to cross. But price is still under the 200-4H SMA.

Now, the market has basically reached the consolidation breakout target noted in the 4H chart. As it tagged that projection and the 1485 level, it is showing some initial resistance.

Momentum: The RSI has tagged 70, which could be a sign of bullish momentum. However, because we had been in a downtrend, it should probably be interpreted as overbought. We might still have a little more upside risk, but at this point, if you see a bearish divergence in the 4H chart with the RSI, it is probably a good idea to consider completion of correction, and possible time to revive the bearish outlook first to 1400-1405 area, than the 1320.50-1335 lows.

Silver  4H chart 7:50AM EDT 4/26/2012


Throwback from after corrective rally: The 4H XAG/USD chart shows a market that broke above a congestion/consolidation zone when it popped up above 24.00. This break lags the one in gold, which occurred last week. Also, silver’s corrective rally has not reached the consolidation breakout target near 26.00.

During the 4/26 session so far, silver has come back to test this consolidation area. Note that, like gold, it has been in a downtrend since Oct. 2012. Therefore, the RSI tagging 70 should be interpreted the same way I had for gold – overbought. Now that the overbought condition is resolved as the RSI comes back down, the question is whether there will be another corrective rally toward that 26.00 projection, or whether the bearish outlook will be revived.

Central pivot: If silver can come back down below 23, which is the central pivot in the 22-24 consolidation area, then we are likely going back down at least toward the 22.02 low.  A break below 22.00 opens up further bearish outlook. Above 23.00, there is still upside correction risk, although still in the context of a downtrend, so it should be reactive to overbought conditions.