Gold continues to oscillate within a relatively narrow range contained by about $1215 on the downside and $1230 on the upside. This range-bound oscillation within the context of a longer term downtrend is what technicians call a "bear flag":
Gold (Daily - 1 Year)
A bear flag is a bearish pattern simply because the tendency is for the controlling trend to resume after a period of digestion takes place. After all, markets don't move in straight lines for very long and oversold markets tend to bounce as short sellers take profits and bargain hunters buy at what they believe to be cheap prices. However, if an oversold market can't decisively turn the tide and generate a powerful rally there is a strong probability that prices will soon make lower lows.
Gold is interesting right now because sentiment is depressed and futures positioning suggests that the market has reached an extreme which could easily result in a powerful rally at any moment. However, bounces have been weak and there hasn't been a sign of a real capitulation event that would mark a sustainable bottom. It seems that all the ingredients are in place for a major low except for a capitulation event. Remember, tops are a process and bottoms are events. Gold is waiting on that event right now.
Gold (Daily - 4 Year)
If we zoom out to a 4 year chart of gold it's easy to see the importance of the area just below current levels ($1200-$1210) - it's not difficult to imagine that there must be a bevy of sell stops just below the $1200 psychological round number level. A drop below $1200 would likely trigger a deluge of sell orders which could easily carry price down to $1180 (or even slightly lower). Such a violent sell-off could result in the capitulation flush that we've been waiting several weeks for. Once the market has been sufficiently flushed and sentiment is almost at a zero (no bulls left) we could be ready for a 50% retracement of the recent decline ($1310 down to ~$1180) which would probably bring gold back up to the $1240s within a week after the low has been put in place.
Remember that countertrend "short covering" rallies tend to be the most violent and powerful of all rallies. This is simply due to the fact that so many market participants are leaning to one side of the boat and many other participants rush in from the sidelines in an attempt to not "miss out" on the bottom. This is the kind of capitulation event setup (downside flush followed by violent rally) that feels like it could be imminent in gold.
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