NEW YORK (TheStreet) -- Gold is feeling the brunt of global market disarray and appears to be undergoing selling from investors caught in "bull traps" in China (and other overleveraged markets) who need to get rid of some assets but can't sell halted or illiquid stocks.
As this monthly bar chart of gold futures shows, however, the Decision Support Engine is signaling buy actions into the zone around $1,000, plus or minus $100, rather than sell actions. Unfortunately, the crowd is in panic mode, and investors typically make emotional/subjective decisions when conditions are like this. So it's very likely that these late-joining sellers, who should have sold into gold's 2011 peak (near $1,920), will be caught in a "bear trap" in this market.
The current price of $1,103 is sitting on the lower three-standard-deviation band (containing 99.7% of normality). Overnight, gold tested $1,080 briefly (which was just above the lower four-standard-deviation band, which contains 99.9% of normality) but reversed higher.
Not only is this price $400 more than the 2008 low, but it's occurring as stochastics are making a series of lower lows. This is setting up a huge bullish divergence, with sentiment extreme but prices not making lower lows.
Various surveys of traders and money managers show multiyear to multidecade extremes in bearish sentiment. Historically, when the crowd adopts extremely negative commitments about a market, a change in an aging downtrend is about to reverse higher. Although one can't rule out a slightly lower price in these metals, the stage is set for a "shocking and surprising" bottom into the dark green box that the price just entered!
Combining these rare extremes, the DSE is flashing a strong warning that sell actions are not indicated here. Rather, buy actions are indicated in both gold and silver.
The playbook for the near future should come close to the historic pattern where news surfaces that is used to justify selling that precedes a big rally.
China is the scapegoat of the season, and stories about that country's weakening demand for commodities is how late-joiners are rationalizing their current liquidation of gold, even though prices have been falling for years.
When gold futures prices arrive near the red box ($1,625, plus or minus $100) in coming years, late-joining buyers will then point to some good news -- maybe that Chinese demand for commodities is surging -- to justify their buying. But they will have missed most if not all of the rally by then.
Don't be one of those late-joining buyers.