|• Both Gold and Silver have broken out of their respective range simultaneously to the upside with great momentum
• A bottoming process might be forming here as the RSI rebounded back above the 30 oversold region
• Hold firm on our belief that Gold and Silver have entered into a new bull market
Gold suffered huge losses after the 1300 critical support gave way on 04 October 2016, triggering all the stop losses below it. As a result, Gold was flushed down 5% to a low of 1241 within 4 days where it consolidated subsequently.
Nonetheless, from a wider perspective, we believe that Gold is only in the midst of a correction phase to the healthy bull market that just started in December 2015. The 8 year cycle, 200 Moving Average and Gold Silver ratio studies have shown that Gold has already turned into a bull market.
With that in mind, the current correction presents a good buying opportunity to hop back on-to the uptrend. Buying the dip should be the current strategy for Gold and Silver and that led us to take a deeper look into the past 10 year Relative Strength Index (RSI) performance to optimally time the market.
Relative Strength Index performance
We did a study on the RSI, specifically to spot buying signals when the RSI rebounds back above the 30 level after dipping into the oversold region. A RSI reading above 70 indicates overbought territory while a RSI reading below 30 indicates oversold territory.
For this study, we analysed the data going back to 2006 where Gold and Silver experienced both Bull and Bear market.
During the booming bull market from 2006 – 2008, the RSI did not even tested the 30 oversold region. The lowest it tested was the 33.67 area and the average oversold region hovered around the 35.50 area.
Chart 1. Gold (Daily chart)
Once the RSI hits the oversold region again after a bull market, it tends to signal a trend reversal, suggesting the prior uptrend might be weakening.
A bottom tends to emerge after a few tests of the oversold region where it presents the optimal location to reposition back into the uptrend
The bottom showed itself after the third attempt where it rebounded off the oversold region in October 2008 where it embarked into a whole new raging bull market until 2011.
Once again, during the whole period since 2011, the RSI has never tested the 30 oversold region. The lowest it tested was 30.58 which only happened once while the average for the oversold region was around 37.00 where the rebound signalled ample opportunities to rejoin the uptrend.
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