A Triple Buy Signal in Gold Stocks

By: Michael Swanson | Mon, Apr 9, 2007
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If you have been watching gold stocks or if you own them this chart below is the only thing you need to think about right now. It is on the verge of giving us a Triple Buy Signal. Signals this powerful normally lead to 7 to 12 month runs in gold stocks. Basically, the next big rally is about to begin. So, if you are on the sidelines right now you may want to strongly consider buying gold stocks this week. And if you are already invested in gold stocks you need to decide whether or not you want to buy more.

Gold stocks have been in a long consolidation phase for over a year now. In the past, every time gold stocks have gone through similar long consolidation patterns they have emerged to launch powerful bull runs. There are three technical signs that suggest that this pattern is about to repeat in the near future:

1) Simple support and resistance trendlines are a staple of technical analysis. As you can see, the XAU gold stock index has been locked down by its upper resistance trendline since May of last year. The XAU is now only points away from breaking above this trendline resistance level, an act that would generate a second long-term buy signal for gold stocks.

In the past twelve months, every time it has rallied up to this trendline and failed to break out, a sharp correction occurred. If gold stocks don't immediately drop hard, they will be poised to break out and close above this trendline resistance level to generate a powerful buy signal. This trendline is currently at 146 on the XAU.

2) The 200-day bollinger bands are coming together. Bollinger bands measure the volatility of an index. When they come together it means that volatility is shrinking. This is important because shrinking volatility leads to expansive moves. 200-day bollinger bands are long-term indicators.

The two bands have acted as support and resistance for the XAU and HUI for the last year. It takes months and months of consolidation for them to come together like they have now. In fact, they are now closer together than they have been in five years. The XAU and HUI are likely to break above these 200-day bollinger bands and begin their next move up sometime within the next two weeks. Notice what happened when they did this in 2003 and 2005. A move above this 200-day bollinger band on the XAU will trigger a second long-term buy signal.

3) The action in gold stocks tends to lead the action in the metal. It is bullish when gold stocks outperform the metal and bearish when they lag the action in gold. During this past consolidation phase, gold stocks lagged the metal, just as they did during the last two long consolidation phases. This caused the XAU/gld and HUI/gld ratios to decline as you can see from the above chart. The last two consolidation phases ended once the XAU/gld ratio broke this downtrend line. The ratio has been steadily moving up during the past three weeks and is close to breaking out. Such a breakout would give us a third long-term buy signal.

If all three signals occur within the next few weeks we then will have a confirmed triple super buy for gold stocks. The next leg up in the gold bull market will begin. But those waiting for full confirmation of the signal will easily end up missing out and will buy for higher prices. The time to think about buying is now, not later.

You can see these technical patterns in more detail on the chart above. Clearly something big is brewing. Last week, commercial hedgers covered over 9,000 of their short futures contracts despite the fact that gold rose higher. This is unusual as usually the commercials short as gold moves up. It is another bullish sign. Maybe they know something.

There are many reasons gold can go higher from here as you well know - from the failure of gold manipulators to hold the price down, a Fed that will lower interest rates if real estate implodes this year, a bloated US current account deficit well past the danger level, and wars and rumors of wars in the Middle East. Pick your personal favorite. But the fact of the matter is that you can't know everything that is going on in this age of secrecy. But the great thing is, you don't need to know "why". You just need to be prepared so that when something great does happen you are positioned to profit.

I'll be the first to admit that the gold market is a tough one to navigate. Experience has taught me that it pays to find the right stocks to invest in during the big runs. This triple buy signal has gotten me more excited about gold stocks than I've been in quite a while and there are several stocks that I've recently added to my Top Ten list.

To find out what gold stocks Swanson is buying now join his free weekly gold report. Start now: http://www.wallstreetwindow.com/weeklygold.htm.



Michael Swanson

Author: Michael Swanson

Michael Swanson,

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