Email of the day (2)
Comment of the Day

August 12 2011

Commentary by Eoin Treacy

Email of the day (2)

on gold's overextension relative to the 200-day MA:
"I refer to your interesting piece about over-extension beyond the 200 DMA, in respect of gold.

"I have a query. You have compared over-extension in percentage terms. Hitherto, I have always thought of and calculated over-extension in absolute terms - is that wrong? My thinking has been that it is the absolute distance away from the 200 DMA which should matter. While I will defer to your superior knowledge, while 20% today looks less than in 2006 and 2008, if gold was to reach $5000, the same 20% would work out to a $1000 deviation from the mean - would we still consider it to be less of a deviation than in 2006/8?

"Just some food for thought but I will be guided by your comments."

Eoin Treacy's view Thank you for this topical question sure to be of interest to other subscribers. I suspect that leveraged short-term traders are much more interested in absolute price moves. However, long-term unleveraged investors are often more concerned with percentage appreciation. As such I believe we need to look at both.

Gold is a much more expensive contract now than it was five years ago. Back then a $10 move could have been considered a dynamic, now it hardly registers on the chart. I find it useful to compare past overextensions relative to a mean such as the 200-day MA in percentage terms because it gives us a valid point of comparison.

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