When to Ignore Extreme Oversold Conditions

Gold has plunged to extreme oversold territory but unless one is very sophisticated with timing entries and exits and managing position risk, these technical reversal signals should be ignored. Extreme oversold, and also overbought, conditions can be quite misleading as market participants are not driven by technicals but by fear or greed.

GLD_20130416

The RSI(14) fell below 20 and the MEI(14), my proprietary indicator of market strength, has fallen to levels witnessesd during the September 2011 drop, as shown on the above GLD chart (blue vertical mark). However, these indicators are very sensitive to short-term price changes and can reverse quite fast into neutral territory while prices either move sideways or recover slightly. Then the market may take another plunge quite fast. Remember that while the strategy published by some analyst in some website may be executed, she may be changing her view completely.

My opinion is that although calls about a technical reversal may be valid, they are a quite risky approach for investors and traders not familiar with quantitative trading and risk management. Individual investors still long gold should consult a licensed professional. Trying to recover losses in volatile markets may lead to total loss. This market can get brutal.

Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours.. 

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”) 

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