Cramer: Gold Bulls to Laugh Last?

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Gold suffered its biggest one-day decline ever this week; it slipped 8% in a single session.

Whenever a commodity achieves that kind of superlative, investors often wonder if it's a sign of the bottom – that is they wonder if the selling has reached a crescendo.

If that's the case, the Warren Buffett adage, 'be greedy when others are fearful' may seem appropriate.

However, in the case of gold, circumstances are far from clear. After a decade of marching higher and outperforming just about every other asset class, the precious metal has been in a slow and steady decline since October.

Since global markets are in a state of rapid change; it's not unreasonable to think that sentiment in gold has changed significantly and perhaps permanently.

In cases such as these, where there are both strong bullish and bearish arguments to be made, pros often turn to the charts for insights.

Mad Money host Jim Cramer turned to analysis provided by Carley Garner, the co-founder of DeCarley Trading, the author of A Trader's First Book on Commodities and a Cramer colleague at TheStreet.com.

According to Garner the gold bulls may have the last laugh.

Looking at something called the Commodity Futures Trading Commission's Commitment of Traders Report, Garner has identified a positive pattern.

The latest report shows that large speculators are now holding the smallest net long position in gold since mid-2012. The last time big money trimmed their positions by this magnitude, gold shot higher.

At the time, the price of gold was $1,530, and it then ran up to $1,790, for a nearly 17% gain.

The analysis suggests there is plenty of upside once the selling is exhausted. But that begs the question - when will the selling be exhausted?

Robert George Young | Getty Images

Looking at the Relative Strength Index or RSI, Garner thinks gold is already oversold. Specifically, she says the RSI has dipped below 30 – not only is that an oversold signal, it's the first time gold has touched this kind of oversold level since well before the financial crisis.

Looking at key levels, Garner believes the level at which it bounced overnight - $1,320 – is significant. She thinks it could become a level of strong support.

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Going forward, Garner believes the next critical level is $1,450, gold's sharp down-trend resistance line. (It was also a level at which Goldman Sachs issued a bearish recommendation on the precious metal. As it happened, that level turned out to be the starting point for the accelerated selling.)

If gold can pierce that $1450 level Garner thinks gold could breakout.

From there, Garner believes the next level of resistance should be $1,500, and if it can break through that level, she thinks gold trades $1,620.

Of course it's worth noting that not all chart patterns are bullish. If current levels don't hold, she thinks gold might trade down to $1,285.

However, her analysis suggests the path of least resistance should be higher, even if there's another leg down first.

Jim Cramer largely agrees. He believes that gold is an important part of every portfolio and says, "If you don't own any gold in your portfolio, you might want to take this opportunity to do some buying, albeit slowly."

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