Gold’s Thanksgiving Crash and Friday Recovery

Nov 27, 2009: 11:14 AM CST

Along with the quick global market decline that occurred while the US was celebrating the Thanksgiving holiday, gold fell $60 into the night session, highlighting the potential risk of an overbought, overextended market.

As of Friday morning, gold has regained most of those gains, but the sudden volatility was not a fun experience for most participants.  Let’s see it on the overnight charts.

Gold (mini-gold shown here) closed on Wednesday near the $1,190 per ounce level – all time highs.

Just after midnight CST, gold began a slight decline which turned into an avalanche down to the $1,130 per ounce level but now is in the process of recovering most if not all of these losses going into the weekend.

The main educational point that comes to me is that there is risk in buying grossly overextended markets at their highs, unless doing so from a breakout pattern such as a break above a resistance level or triangle/rectangle pattern.

Many traders advise against “chasing” markets, and suggest that better opportunities exist on ‘pullbacks’ or retracements against a powerful up-trend.

Buying grossly overextended markets can be a game of “musical chairs” where the music will stop eventually – that’s guaranteed – but the point at which it stops is unknown (and thus risky).  Risk/reward relationships are difficult to assess, as are specific upside targets to play for along with logical levels to locate a stop-loss.

While it looks like gold traders will shake this one off if they somehow didn’t see or stress over this overnight plunge, nice rallies like this might not always follow sharp declines in prices – especially on such unexpected news as Dubai defaulting (honestly, who saw that coming?).

Be safe out there – markets seem to be very jumpy in all directions lately.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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