Gold has had an incredible run up since breaking above $600 in mid-April so the major sell-off that materialized on Monday should not have been a surprise, especially for those of you that study charts.
The price of the basis June gold on the COMEX plummeted $32.80 or 4.61% from the close of May 12 due largely to what I believe was technical selling resulting from an overextended market. Just taking a look at he chart, you should notice the relatively steep angle of the trend, which was a setup for some selling. The fact is the rapid rise in gold was not sustainable and reflected too much euphoria. Markets that rise too quickly generally are vulnerable to selling.
The upward break of the June gold to an intraday and 25-year high of $732 on May 12 was well above the 50-day and 20-day moving averages of $609.37 and $665.53, respectively. In situations like this in which prices break rapidly to well above key moving averages should always be view as a warning of a potential sell- off. You do not enter into new positions. I always generally do not advise chasing prices higher, especially in cases when the rise is rapid. It happens with stocks and commodities alike. Just take a look at Google Inc. (NASDAQ/GOOG).
Gold prices bounced back yesterday on oversold buying, which is typically normal after a major sell-off. For traders, the next few sessions will help dictate the direction of gold.
The June contract was able to hold at the 20-day moving average of $665.53. Going forward, watch if gold can form a buying support base where it can rid of the sellers and attract new buyers. Failure to hold could see the June gold break below the 20-day moving average.
Rapid run-ups are generally not sustainable in the short-term and any potential trade should be thought out carefully either with stops in place or enter with a small position just in case selling occurs.