Gold Stocks Recharging For Massive Breakout

By: Michael Swanson | Mon, Feb 5, 2007
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So, what's going on with gold? We saw gold stocks drop in the first half of January and then rebound. This past Friday gold fell over ten dollars. It's been a roller coaster ride for gold investors, but not all fun and games. Many are scratching their heads and asking "what is going on?" Let's take a look at what our roadmap - the charts - to tell us:

Since last May, the XAU has been trading in a long consolidation phase with support at 120 and resistance at 160. These two levels are its 200-day bollinger bands and have acted as firm resistance and support for almost a year. During this time the XAU has had many ups and downs, swinging violently at times within this range, but it has not entered a sustainable bull or bear trend. It has been locked in a classic trading range.

We will not begin another leg up in the gold bull market until we see gold make a sustainable rally above 700 and the XAU stay above 160 for over a week. Once we see both of these things happen then we will know that the next big bull rally in gold and gold stocks has begun - one that should take gold over 1,000 an ounce and XAU well above 240 within twelve months.

I believe we will see gold and gold stocks break out of this long trading range very soon and begin this big rally. Right now is the time to pick up gold stocks and build a position. Rather than waiting for the breakout and chasing the stocks as they quickly rise, those who get in now will be well rewarded.

Look inside this long-consolidation pattern and you'll see that gold and gold stocks have been trading in a smaller consolidation pattern since November. We saw gold stocks rally through December and then dip into the middle of January. They have since bounced and appear to have stalled out. They may dip just a tiny bit more, but by the end of this month I expect them to break out of this mini-consolidation zone and begin a rally up to the long-term 160 resistance point as gold marches to 700.

You can see this short-term resistance pattern on the chart above. Current resistance on the XAU is at 142 - the point of its downtrend resistance line while support is at around 134 - the point of its lower support trendline. It's possible that the XAU could fall from here to retest this line one last time, but that isn't really that important. What is important is that the XAU appears to be coiling to break through 142, which should cause it quickly rally up to the 160 area in just six weeks.

The situation is very similar to what we saw in the summer of of 2005 when the 95 level on the XAU acted as resistance. Once the XAU broke through its resistance trendline it quickly rallied up to its 200-day bollinger, where it paused for a few weeks. It then blasted off through that level and rallied sharply until May of 2006. Gold investors, who prepare themselves now, can look forward to big profits later this year from a similar rally.

I bought a position in October near the bottom and then sold it in January when it appeared that the December correction would pick up steam. We have since rallied to just below the point I sold my position.

I am now getting ready to buy back in and am putting together a list of 10 stocks that I think will outperform the rest of the gold market for the next 12 months. In that time I believe these stocks will generate returns of over one hundred percent.

This list will be available to WSW Power Investor members only.



Michael Swanson

Author: Michael Swanson

Michael Swanson,

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