Chart of the Day - Tuesday, August 4th, 2020

Friendly reminder that overbought is a good thing...

"regime change?"$GLD $IAU $GDX pic.twitter.com/FwMnU0lCx2

— J4 (@J4_doji) August 4, 2020

Today’s Chart of the Day was shared on Twitter by @J4_doji. It's a weekly candlestick chart of Gold over the past two decades, along with a 14-period RSI indicator in the lower pane. Gold Bugs celebrated another milestone today as price closed above $2,000 an ounce for the first time ever. The recent momentum has pushed the RSI into "overbought" territory, above 70. "Overbought" sounds like a bearish characteristic, however, @J4_doji reminds us that longer-term, the fact that RSI has reached "overbought" territory is actually bullish. Take a look at the period between 2001 and 2011. RSI was in what we call a "bullish regime" - oscillating between 50 and 100 for a decade. Price surged over 500% in that time, and RSI never reached "oversold" levels. Then, in 2011, price began to stall for about 8-years. RSI shifted into a "bearish regime" - repeatedly hitting oversold levels and failing to stay overbought. The fact that price is currently breaking out to all-time highs and RSI refuses to fall below 50 is evidence that momentum has shifted back into a bullish regime. The lesson here is that RSI can remain "overbought" for years, while price moves significantly higher.