Gold remains below $1800 but tentatively holds above the 50-day MA

Gold futures traded to a lower low than yesterday but held above its 50-day simple moving average. Today gold traded to a low of $1785.40, below yesterday’s low of $1787.60. That’s $0.10 below the 50-day moving average which is currently fixed at $1785.50

This is the cycle length (50-day) market technicians use to indicate whether a stock or commodity is in a short-term bullish or bearish trend. When gold, silver, or the dollar index are above their 50-day moving average, market technicians interpret that market as being in a short-term bullish trend. Simply put, in a sustained uptrend the price of gold will generally remain above the 50-day moving average.

According to Investopedia, “The 50-day simple moving average (SMA) is popular with traders and market analysts because historical analysis of price movements shows it to be an effective trend indicator.”

Market technicians use the 50,100 and 200-day moving averages to determine the short-term, interim term, and long-term trend direction. To make this determination even stronger, the averages should be stacked with the shortest time cycle on top and longest on the bottom (in an uptrend), this is known as full bullish alignment.

The chart above is a daily Japanese candlestick chart of the dollar with three moving averages plotted (50 in green,100 in blue, and 200-day in red). It is an excellent example of a market that is in a strong bullish uptrend. In August 2021 the dollar index based on these three moving averages came into full bullish alignment. The strength of an uptrend can be visually determined by the distance between each of the moving averages. As long as the averages are in full bullish alignment, and the bullish trend is gaining strength, the distance between the three averages will continue to widen.

The chart above is a daily Japanese candlestick chart of copper futures. It is an excellent example of a market moving from bullish to bearish market sentiment. At the beginning of June market sentiment for copper, futures shifted. The three moving averages were in full bullish alignment in March, April, and May. However, in June and July, you could see market sentiment reverse with the 200-day MA above the 100-day MA before moving above the 50-day MA.

The last chart in today’s article is a daily Japanese candlestick chart of gold futures. It contains an excellent example of another way market technicians use multiple moving averages. When one moving average crosses below or above another time cycle it is considered significant. The example above shows the 50-day moving average crossing below the 200-day moving average at the beginning of July. This creates a pattern called a “death cross”. This pattern reflects recent price weakness as it refers to a drop of a short-term moving average below a longer-term cycle.

Just as in our article yesterday which focused on trendlines, chart analysis using moving averages is not perfect. Because it is based on averages it will always lag behind real-time price movement. They are another valuable tool for the market technician which can give traders an insight into key levels of potential support and resistance.

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Wishing you as always good trading,