Gold Bears Have Two Weeks to Live
Early last week gold stocks fell hard only to end the week with a rebound. The drop caused many gold longs to liquidate their positions and left others wondering if we are going to even see another bull run this year.
On April 9, 2007, in my article "A Triple Buy Signal in Gold Stocks," I suggested that there were three technical indicators on the verge of giving powerful long-term buys for gold stocks. Since then we have seen gold stocks rise a bit, dip hard, and then rebound, but we have yet to see a new bull run for gold or gold stocks. Gold still remains below $700 an ounce and more and more gold longs are throwing in the towel.
I'll let you know why you shouldn't be one of these people in a moment.
It's been over a year since we saw the last major top in gold and gold stocks. Gold bugs have suffered, holding on to positions that trended sideways or sank in value as every potential breakout failed. More important than the monetary toll they have suffered is the psychological burden of living through the ups and downs of the consolidation trading range gold stocks have been stuck in all year.
People have been selling due to impatience as gold has continued sideways and a fear of losses every time gold stocks dip. Remember last summer when several leading gold commentators suggested that a big head and shoulders top was about to bring a new bear market in gold stocks?
Well, what about now?
In my article, I cited three things that told me a new bull run in gold stocks was beginning. I wrote the following:
"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 will then 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."
The first signal happened several weeks ago. The 200-day bollinger bands for the XAU are still coming together, suggesting that any break to the upside will have the potential to create an even more powerful rally than I imagined a month ago. The XAU/gld ratio remains stuck below its downtrend resistance line, but is going sideways and appears to be poised to breakout of it in a few weeks. Take a look at this chart:
You can see on this chart how the 200-day bollinger bands are narrowing. Take a look at how the bollinger band width indicator in the chart above continues to drop. What this means is that the volatility in gold stocks is still shrinking.
I know the XAU just dipped below 140 last week, but this was the quickest and most shallow correction in gold stocks we've seen in a year. The recovery happened in the blink of an eye.
This suggests that the volatility is reaching an apex. We may see gold stocks trend sideways in a narrow range for another week or even two, but after that we should see a rally that breaks through the upper 200-day bollinger band to establish the next powerful intermediate-term upleg in gold stocks.
How high could it go?
Well, history suggests when the XAU/gld ratio hits .20, which it did in March and once again in May, the XAU rallies 40% over the course of the next twelve months. And, of course, the right gold stocks do even better. In fact, some of my gold stocks broke out last week and others that I am watching right now are poised to make similar moves this week.
In the final analysis, the next two weeks should complete the end of the consolidation phase for gold stocks and bring the next bull run for gold stocks.
In two weeks the fun should begin. Gold bears have two weeks of life support left.
To find out what gold stocks Swanson is buying now join his free weekly gold report. Start now: http://www.wallstreetwindow.com/weeklygold.htm