This is the ASX index (ASX:XGD) that includes producers of gold and related products. The last two weeks have been bearish: the price action has been correcting after it reached the previous high of 2009. As a result, a double-top technical pattern has been built and suggests now a further retracement towards 4,500 points. The closing price yesterday was 4,500 points.
After the large decline occurred last year, the XGD index found some support around 2,675 points (point a on the chart) in late October last year. It bounced back sharply to a high of 5,677 points (point B) in last February. This was a rise of 112% in just 4 months.
Let’s consider this huge rise: a first retracement pulled back the price action to the 38.2% Fibonacci level in April (point C), at 4,500 points. From this point, the index rebounded to a recent high posted at 5,589 points in early June (point D). The immediate correction from the following day indicates that many traders took the opportunity of this double-top to take profits or even to go short there.
The index has already fallen by 9% in less than two weeks, and it is likely that the objective for the current bears is lower. Indeed, the double-top pattern is building an “M” on the chart, where the second leg of this “M” typically falls to the level of the first leg.
Here the first leg starts from point E to point B, whereas the second leg starts from point D and may end to the level of point E, therefore around 4,500 points. It’s 11.6% lower than the current levels.
The indicators also argue for such a move. The MACD has lost some momentum and has crossed below its moving average, confirming a bearish signal. The RSI well detected the shift in early June as it crossed below its 70 line. It means that the index was clearly overbought and that there was a real risk of trend reversal.
Good investing,
Gabriel
