200-DMA indicates gold rally may be coming to an end

US-China trade deal talks are progressing well and they might lift the existing tariffs.

Reuters
Gold prices have been consolidating and are trading in the range of $1,520-$1,485 zone, but in spite of this consolidation, prices are over extended if we look from key trendline this summer.

That key trendline is 200-day moving average. The gold bulls have patiently waited for the next phase of rally and wait is getting stretched, as China came with the statement that US-China trade deal is progressing well and they might lift the existing tariffs.

This news is bearish for gold as a primary reason for rally in gold was slowdown due to trade war tariffs.


In October, in spite of weak US Dollar, gold was trading in a range. The reason was strong US economy data and trade war tension slimming down.
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As seen from the chart, whenever gold prices have drifted far from 200-DMA, it tends to again test the moving average going forward.

In July 2017, gold prices were far away from 200-DMA and prices met 200-DMA in September 2017 (two months). Next in January 2018, we can see the same scenario and this time prices met 200-DMA after five months i.e. in May 2018.
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Again in July 2018, prices went lower below this level and there was quite a gap between price and the zone. The prices met the level in November 2018 after a gap of 4 months.

In Jan 2019 again the price action was away from 200-DMA and met in March 2019 after a gap of two months. Now from the start of July 2019, price action is still far away from 200-DMA and it’s been four months and yet prices are nowhere near the level. So we could see price converging in the next month as historically after five months, prices do come near 200-DMA.

So even though gold is consolidating and nowhere in overbought zone, according to oscillators like RSI, 200-day moving average do suggest that gold rally is overextended. Whenever such a scenario comes, it sends the message to technically oriented traders that market is potentially overbought or oversold and vulnerable to bear or bull raid. It is for this reason that market participants take profits or sell outright whenever the distance between price and the underlying moving average becomes conspicuous.

(Investors should consult their financial advisers before taking any investment calls based on this article)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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