|
I believe the next few days are going to
be key days for gold stocks just as May was a key time for the S&P 500
and the broad market. If you were following me then you'll know that I took
short positions against the general market back in May. However I did not
short at the exact top. In fact I got in a little early and let the S&P
500 go up a percent above my entry point. I was convinced when I got in that
the market was about to make a critical top - one that would last for the
rest of the year - but I wasn't sure at the exact price or moment that it
would come. I was only certain that it was coming within a week, so I decided
to just start to build a position. Of course it worked fantastic as the
market has fallen apart since then.
Gold stocks are now in a similar critical
position - however, instead of topping out they appear to me poised to put in
a final bottom within the next five trading sessions, maybe even today - and
it will be one that should last for the rest of the year and lead to a huge
rally.
 
On May the 6th I wrote an article titled
"Know This Seasonal Pattern for Gold Stocks," which included the
above chart. In this I article I wrote the following:
"As you can see gold has a tendency
to make a peak in the April-May time period and then consolidate through the
end of August and then breakout in September and have its best months through
the end of the year. This seasonal pattern held true in this gold bull market
except for last year when the whole stock market experienced its first
subprime meltdown last August. If it wasn't for that the same seasonal
pattern probably would have held true again."
"If the pattern repeats then we can
expect gold stocks to rally until the end of the month and then retest their
lows, maybe even making a slight minor low, in June or July and then base for
a few weeks and breakout at the end of August or September to rally through
the end of the year. This would fit the scenario I came up with yesterday
from the overall gold and gold stock chart patterns."
Gold stocks have unfolded so far almost
exactly as this forecast called for. However, what is interesting is that by
several key yardsticks gold stocks are now extremely oversold when compared
to the price of gold.
As Dave Skarica points out in his monthly
newsletter, ""The XAU to gold ratio has traded between .16 and .27.
Basically when the ratio is under a fifth of the price of gold (.20) gold
stocks are cheap when compared to the metal, especially when the ratio gets
under .19. As we are about to go to press the XAU to gold ratio is getting
close to .18; this is the lowest level since the spring 2003 bottom in gold
stocks. What is interesting is that was the start of a huge 9 month rally in
gold stocks, which saw the XAU gain over 75% in value."
Gold stocks also tend to lead the metal.
So when the XAU/gold, HUI/gold, and GDX/gold relative strength ratios are
declining it tends to be bearish for the metal and when they rise it tends to
bullish for both stocks and the metal. All of these ratios are now at extreme
oversold levels.
Another indicator that I follow closely
to gauge the long-term picture for gold stocks is the 200-day Bollinger
Bands. These bands expand when a market is experiencing volatility and is
locked in an uptrend or downtrend and contract when a market is
consolidating. When the bands come together they always signal a looming
expansion - which comes when a new uptrend or downtrend is established. The
banks also tend to act as long-term support and resistance levels. so with
the HUI lower 200-day Bollinger Band now at 385 the HUI is near long-term
support.
The point is it takes a six month or
longer period of consolidation to make the bands contract - and in bull markets
such periods of consolidation lead to new bull runs. Gold stocks have tended
to begin such bull runs in late August through the beginning of September to
fit their historic seasonal pattern.
Since they peaked in March gold stocks
fell hard into May and then traded in a sideways range with resistance at 470
on the HUI gold bug index and support in the 390-400 area. Below that support
is at the lower 200-Bollinger Band currently sitting at 380.
If gold stocks are going to go into a
bull run and match their historic seasonal and technical patterns then this
current move down from the middle of July to now will mark the final
corrective wave for gold stocks during this consolidation pattern.
Consolidation patterns have a tendency of exhausting bulls. They get hopeful
when a market rallies up to resistance, but when it then turns around and
falls back to support many of them get disgusted and sell. The time of consolidation
wracks their patience and causes many people to get shaken out right before a
new big sustainable rally begins.
Momentum indicators for the HUI and XAU,
such as the daily stochastics are now oversold. Once they bottom and begin to
rally I expect them to test their July highs within a few weeks. I then
expect that they'll consolidate a bit more and then breakout by the end of
August to begin a new bull run.
I am fairly certain that this bottom will
come over the five trading sessions, and likely in the next few days. What
I'm not sure about as I write this Tuesday night though is whether the gold
stocks have already bottomed or whether they have a little more to go. The
400 level on the HUI may prove to be the floor. If it is not then I'd expect
to see a very quick and short lived dip down to the 380 level and then a just
as fast and furious reversal back above 400 to put in a final bottom.
The point is I feel like I am in the same
situation as I was back in May when I took my short positions. I saw clear
signs that then that the broad market was going to top within a week and just
held my nose and took a position. Now gold stocks are in the exact spot - a
key timing point is looming - and now is the time to buy or start to average
in.
This article is an excerpt from a
WallStreetWindow subscription article. To receive the complete article and my
future articles and stock picks just click here.
Mike Swanson
Editor, Wall Street Window
Disclaimer:
Michael Swanson is the President of USA Capital, Inc., which provides
management, support, and research for institutional investors, hedge funds,
and mutual funds. The ChartWizard is also an employee of USA, Capital, Inc.
Both Swanson and employees and associates of USA Capital, Inc. may have a
position in securities which they mention on WallStreetWindow or any of its
services. In such cases, appropriate disclosure is made. Under no
circumstances should the information received from WallStreetWindow represent
a recommendation to buy, sell, or hold any security. WallStreetWindow
contains the opinions of Swanson and the ChartWizard and is provided for
informational purposes only. Neither Swanson, the ChartWizard, nor
TimingWallstreet, Inc., which owns WallStreetWindow, provide individual
investment advice and will not advise you personally concerning the nature,
potential, value, or of any particular stock or investment strategy. To the
extent that any of the information contained on WallSteetWindow may be deemed
investment advice, such information is impersonal and not tailored to the
investment needs of any specific person. Past results of WallStreetWindow,
the ChartWizard, or Michael Swanson are not necessarily indicative of future
performance.
WallStreetWindow does not represent the accuracy nor
does it warranty the accuracy, completeness or timeliness of the statements
made on its web site or in its email alerts. The information provided should
therefore be used as a basis for continued, independent research into a
security referenced on WallStreetWindow so that the Subscriber forms his or
her own opinion regarding any investment in a security mentioned by
WallStreetWindow. The Subscriber therefore agrees that he or she alone bears
complete responsibility for their own investment research and decisions. We
are not and do not represent ourselves to be a registered investment adviser
or advisory firm or company. You should consult a qualified financial advisor
or stock broker before making any investment decision and to help you
evaluate any information you may receive from WallStreetWindow.
Consequently, the Subscriber understands and agrees
that by using any of the WallStreetWindow services, either directly or
indirectly, TimingWallStreet, Inc. shall not be liable to anyone for any
loss, injury or damage resulting from the use of or information attained from
WallStreetWindow.
| 
