For the last couple of weeks gold futures traded inside a very narrow $30 range.

Then last week Federal Reserve Chairman Bernanke mentioned the possibility that the central bank might reduce its bond purchase program.

Not right now, of course. But sometime. Maybe.

That indirect statement sent gold futures down $100 per ounce  in two days. It has since recovered somewhat; but we think there is more downside to come, and possibly much more.

Here’s why.

DOWN 27% IN SEVEN MONTHS

On November 23 nearby gold futures were trading at $1755 an ounce, well below the all-time high $1923.70 set in September 2011, but still respectable.

On June 25, almost exactly seven months later, the futures were trading at $1277.10 an ounce, a decline of 27%. and a murderous blow to buyers.

There is lots of debate about the causes of that rout —gold enthusiasts talk darkly of conspiracies by The Powers That Be, and they may be right —but technical analysis makes us think the decline is far from finished.

Here’s why:

•    The pace of the decline is increasing, and the down days have wider ranges with higher volume.

•    The price remains stubbornly below the moving averages, with no sign of an upside  breakout.

•    The price has just broken decisively below a narrowing triangle pattern, a reliable indicator of downside strength.

HOW LOW CAN IT GO?

It is possible we may see an oversold bounce from here, although we do not expect it could get very far past the psychological resistance at $1300.

Gold is now in a bear market, and the real question is how low can it go? We see possible support around the $1250 area, which was the breakout point in September 2010 that started the march to the top.

But if that support fails to hold, the next obvious support is down at $1035, the high set in 2008. If we reach that level, gold will have given back almost half of the gain made in this remarkable run up.

SHORT THE BOUNCES

We are short-term traders in gold, and our basic strategy is to short the bounces. But right now we are hoping for a rally.

Gold buyers might see a rally as a sign of hope. We see it as a better shortside entry.

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Polly Dampier is the brains behind Naturus.com, where she gives active traders real-time market analysis and guidance. To learn more visit www.naturus.com

FIGURE 1:

Gold futures as of June 24, 2013. Continuous contract. Daily bars.

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