Gold – does breaching its 50 DMA spell gloom?

I reported in a post on Wednesday that the gold price had breached trend-line support and its 50-day moving average and appeared set for more downside. A bearish “triple top” formation also looked ominous. The subsequent few days witnessed roller-coaster swings with gold trading between $1,378 and $1,353 yesterday, but closing at $1,369 to remain below its 50 DMA ($1,381) for a third consecutive day.

Source: StockCharts.com

The question that invariably comes to mind is what typically happens when the gold price breaks its 50 DMA, especially after having traded above this average for an extended period. Going back to 2000, my research shows four occasions when gold traded above the 50-day line for more than 100 trading days, including the most recent occurrence that ended on Wednesday after 105 trading days. The table below shows how gold performed subsequent to dropping below the 50 DMA. Although gold did not experience significant further declines over the ensuing periods, it only started improving after a few months.

Click here or on the table below for a larger image.

Source: Plexus Asset Management

I next considered the number of calendar days between gold breaking the 50 DMA and again reaching its previous high. The table below shows that on the three previous occasions it took between five and 18 months. Adding five months to December 6, 2010 takes one through to April 2011.

Click here or on the table below for a larger image.

Source: Plexus Asset Management

Based on the small sample considered in the above study, the results would seem to indicate that the gold price might not see all that much more downside but could consolidate at the lower levels and take a while to regain its previous luster.

Considering the technical picture of gold bullion, Adam Hewison (INO.com) provides a video analysis, expecting little further downside with possible support at $1,362. Click here to access the presentation.

Hat tips: Bespoke Investment Group for the idea and Rickus for the number-crunching.

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