Death cross signals potential for lower pricing in gold ~ Part II

Yesterday we focused on the fact that for the first time since January 2020 the 50-day moving average in gold futures crossed beneath the 100-day moving average. This death cross suggests that there might be a pause in the current gold rally. It is more evidence pointing towards the precious metals price decline since hitting historic highs just one month ago.

Since the end of January, we have seen the three primary moving averages in full bullish formation. This means that the longest time cycle (200-day) of the different moving averages is below the interim time cycle (100-day), and that is below the shortest-term moving average (50-day).

It was in February of this year when we had all three-time cycles move into the bullish formation we spoke about above. It was then when the shortest-term moving average (50-day) crossed above the 100-day moving average. This chart pattern is called a golden cross and signals that the momentum of the short, interim, and long-term cycles are all strong. This did indeed signal that we should expect higher pricing which we indeed got.

The three moving average remained in this extremely bullish configuration up until yesterday. This was the first time since January that we saw the shortest term 50-day MA cross below the 100-day MA. This created a chart pattern called a death cross. The reason it is labeled as such is that when the shorter-term moving average crosses below a longer-term moving average it resembles in form and meaning the skull and bones, flown on ships as a message that warned of death and destruction to all who came 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 pattern occurring over three distinct phases. In the first phase of this chart pattern, a stock or commodity is in a definitive uptrend. Technicians look for signs that market prices have reached some sort of apex as the buying momentum begins to contract. This causes prices to begin to decline and is the first sign of a transition in which the bullish faction (buyers) loses control of the bearish faction (sellers).

The second phase occurs when the price decline is strong enough to move the shortest-term moving average below a longer-term moving average. This is the actual cross of the shorter-term moving average falling below a longer-term moving average. The final phase occurs as market forces take pricing lower and the selling pressure continues. This is a key element of the complete pattern because the downward momentum must be sustained rather than short-lived.

Market technicians use other tools and indicators to confirm the strength of this pattern. Most commonly traders and market technicians use trading volume as an indication of the strength of the pattern. If this pattern is found during a period of high trading volume it is considered to be a more reliable pattern. The rule of thumb is that the higher the trading volume the more reliable the death cross is. Traders also use a variety of momentum indicators such as the MACD to decipher if the cross is indeed a sign of continued chart damage.

Currently, this chart pattern has completed both phase 1, and phase 2. It is the continuation of the downtrend in the upcoming days that will determine the strength and validity of the signal.

As of 5:15 PM EST gold futures basis, the most active December contract is currently trading down by $14.10, which is a decline of 0.75%. If gold continues to trade under pressure to lower pricing, and trading volume spikes then the probability that this is a valid chart pattern strengthens.

Wishing you as always, good trading and good health,