Conflicting Technicals for a Conflicting Year End

Many technical analysts are suggesting a bear market ahead for gold, but the very same technical tools are also saying otherwise...

The 200 day moving average is a famous, classical and historically strong indicator often used by long term technical traders, however, it is also often used by shorter term traders whenever significant price action movement occurs near the proximity of the indicator's line. Below is a daily closing prices chart for the XAU/USD pair (Gold-to-USD). On December 14, 2011, gold price broke down through the 200 day moving average for the first time in almost three years:

Now of course to many seasoned, and successful, traders this can potentially signify the beginning of a bear market. Indeed history has show something of a bear - or at least choppy - market following the downward cross between gold price and the 200 day moving average back in early August 2008, which lasted until mid January 2009 (light blue box).

However, I'd like to take the time to point out that while there are many different kinds of technical indicators, some of the most common ones are not just moving averages, but also oscillators that foretell of overbought or oversold conditions. In any given market with any given tradable instrument, there are only three phases that any given price action can be in. Prices can be trending (up or down), they can be sideways and choppy (also known as ranging) and they can be breaking out of a sideways market (to the upside or downside) - and even a breakout can technically be the beginning of a short, medium or long "trend." So one can even say that price is only either trending or ranging.

Now while it is true that crossing a 200 day moving average is indicative of a bearish trend 'beginning', we do not know for certain whether that trend will indeed be a long bearish trend OR just activity at the bottom portion of a range and hence ready to bounce back up. Another two different, but famous indicators that tell us of overbought or oversold conditions are the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI) oscillators. Placing these two indicators with their most common settings into the same chart, and zooming in, we get:

According to BOTH of these oscillators, the market is oversold and gold can recover to the upside soon. So which technical analysis do we go with? Don't worry because that's not the question I'm trying to answer. Rather, I just wanted to show you that three famous indicators are not in agreement on whether gold is actually bearish or not. Therefore, it would be rather presumptive to say that technical data points to a bearish gold market in the near term. I will be holding onto my gold and silver, as well as adding more to my own position once I get more technical data from the new year.

Remember, technical charts are not maps that pinpoint exactly where prices will be, they are more like archaic GPS devices accurate to within a mile...

- Gerald