NEW YORK: Gold’s 20-day moving average falling below its 200-day and its brief foray into a bear market suggest momentum has turned bearish and a further pullback could be on its way. Bullion’s 20-day moving average (DMA) dipped below its 200 DMA on Thursday, in what technical analysts termed a “death cross,” as short-term momentum has turned more negative than long-term momentum and could show that the current downtrend is pervasive.
“Any time there is a death cross. The market is telling us that the underlying strength has changed from bullish to bearish,” said Adam Sarhan, chief executive of Sarhan Capital. Sarhan compared gold’s technical charts in December to a slow-motion train wreck , with the metal having plunged below its long-term upward trendline for the first time in three years and its key 200 DMA.
Gold is on track to end the fourth quarter with its first quarterly loss since September 2008 when Lehman Brothers collapsed, marking the peak of the global economic crisis.
“When you start seeing a lot more bearish technical events occurring, more and more shorter-term traders are inclined to selling their positions,” Sarhan said. Spot gold rose 2 percent to above $1,580 an ounce on Friday in a rebound rally, a day after it briefly dropped more than 20 percent from its record high of $1,920.30 set on Sept. 6, flirting with the common definition of a bear market. The last time a clear death cross formed was in August 2008, following gold’s sharp rally toward $1,000 an ounce. The metal then tumbled to around $680 an ounce in October 2008, just two months after its 20 DMA plunged below its 200 DMA.
“A negative crossover in moving averages can be seen as a selling signal,” said Tim Riddell, head of ANZ Global Markets Research, Asia. “But in gold’s profile, it is probably a confirmation signal that gold has made a cyclical high in the third quarter, and will likely see a more protracted consolidation phase than the market would initially wish to see,” Reiddell said.