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Gold Has Plunged—So What's Next?

Source: World Gold Council

Gold bugs have gotten zapped.

After trading below $1,500 for the first time since July 2011, gold entered into a free-fall on Sunday night and into Monday morning, as investors sold out of their holdings. A major psychological level, especially for bulls—$1,480—was a line in the sand.

(Read More: Gold Slumps to 2-Year Low Below $1,400)

After opening at $1,478.2 and trading to a high of $1,493, the metal skidded more than $100 to reach $1,385. The downtrend began last week after $1,526 was taken out, but disappointing GDP data out of China showing a slowing economy was a major catalyst Sunday night.

Two things put investors on edge last week. The first was the idea that a nation (Cyprus) will need to sell gold reserves to help finance a bailout, and the fear that this will become the norm. The second was that Goldman Sachs lowered its forecast amid moderating inflation in the U.S.

Traders must remember that this market is moving at a very fast pace. Sunday night, gold hit an initial low of $1,422, and that's where the market will find resistance. Above there, $1437.50 will be the next level of resistance.

(Read More: Gartman on Gold: We've Never Seen Anything Like It)

The bottom line is that gold is in an intermediate downtrend. However, it has reached a technically oversold level, which is why I am expecting a corrective bounce in the next few sessions. Since we have fallen over $200 in three sessions, we could bounce back to the $1,475 area.

If you want to play the long side of gold, consider the May $1,475 strike calls, which cost $1,050 each. This will give you 10 days of long exposure. And remember, as with any counter-trend trade, capitalize quickly. You might even consider getting short in the $1,475 area if that price is reached.

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