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November 13, 2006

The Next Move for Gold Stocks
by Michael Swanson

The US dollar closed below its 85 dollar support level on Friday as the bounce in the dollar which began in June has fallen apart. We should see the dollar go down to its June lows over the next few months.

The long-term picture is getting more bullish than ever. However, in the short-term, gold stocks are likely to consolidate and base before moving substantially higher. Gold stocks tend to lead the metal so it is bullish when the XAU/gold and HUI/gold ratios trend higher. It means the gold stocks are rallying at a faster rate than gold. But, last week as gold stocks made a new high for the month, these ratios did not make a new high. We saw a similar non-confirmation in September when the XAU and HUI made false breakouts before entering a quick correction.

The XAU also has stiff resistance in the 142-143 area. This is the point of its resistance downtrend line connecting its May and September highs. 145 is also the 50% retracement level of the May and October lows. If the XAU somehow goes above 142 over the next week it will likely stall out at 145.

I don't think we are going to see a big correction in gold stocks. Just a period of base building and consolidation for 3-6 weeks as gold stocks refuel themselves for a rally that will take them to their 52-week highs. It will probably start in December and the highs should be reached sometime in January. This is nothing new. We have seen similar periods of consolidation after initial bottoms were put in place many times before in the gold market.

For example, in 2004 and 2005 after the XAU bottomed it rallied up to the same resistance downtrend line that it stalled out below last week. It paused for a few weeks and then brokeout and rallied right up to its 52-week highs. In 2004 it topped out there and in 2005 it consolidated again before going on to move higher.

During the 2004 consolidation period the XAU pulled back 17% and in 2005 it dipped 6.4%. Current support on the XAU is at 132 and then 135. 132 would be a roughly 7% correction and a 1/3 retracement of the rally off of the bottom. 135 is the point of the XAU's support line. Both of these levels are powerful support and I doubt gold stocks will fall below them, if they get to them at all. They aren't that far away though. 135.37 was the low of last week.

Michael Swanson,
WallStreetWindow.com

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.

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