This blog has warned about a short squeeze coming in gold in this June 11 post. It is interesting how an island reversal, which is a classical chart pattern, invalidated a 50-200 moving average death cross and a descending triangle.
This chart in GLD is proof that for every pattern there is a potential counter-pattern and this makes visual and basic technical analysis trading a losing proposition for most. In a June 11 blog I wrote:
If the stock market shows short-term weakness and the dollar stops rallying, then the squeeze of shorts will become a much easier job. As long as the dollar is rallying any gains in gold and GLD are limited although the dollar-gold anti-correlation has decreased significantly this year. Regardless, a rally to $122.85 may be enough to force shorts to scramble for cover.
The dollar paused and the technology sector showed weakness after a rally. The massive squeeze in gold invalidated the death-cross and the descending triangle shown on the chart below:
The death-cross shorts never had a chance to make a profit. After the cross occurred, prices moved sideways and then rallied to test resistance at $122.85. The gap above the 200-DMA is a strong move that may signify the start of a short-term uptrend. An island reversal pattern was formed that also signifies trend reversal.
GLD has entered into overbought territory and there may be some profit taking here but the strong breakout above $126.63 sets the stage for a test of the April highs near $128. However, there is no reason for getting too optimistic here about a longer-term reversal in gold’s downtrend. Technicals cannot say anything about that and fundamentals are too confusing at this point.
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Disclosure: no relevant positions.
Charting program: Amibroker