Chart of the week: Gold is now the most oversold in more than 16 years

Thanks to an incredible two day crash in the gold market, the US dollar price of gold is now the most oversold in more than 16 years, and a sharp reversal is now very likely.

The chart below shows the US dollar price of gold stretching back to 1993. It also shows the RSI (relative strength index) – a technical momentum indicator that determines overbought and oversold conditions in a market. The 14-day RSI (circled) is now the most oversold since January 1997.

20 year (daily) chart of gold (Click on the chart for a larger version)

20 year (daily) chart of gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The Relative Strength Index measures the speed and change of price movements, and oscillates between 0 and 100. The indicator is considered overbought when above 70 and oversold when below 30. Today it is just 15.30.

Markets fluctuate between overbought and oversold, and like an elastic band, the more they are pulled in one direction the more they tend to snap back in the other. In the coming days or weeks, we can therefore expect a sharp reversal in the gold price.

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