This Will Be A Critical Week for Gold Stocks

By: Michael Swanson | Mon, May 28, 2007
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On May 7, 2007 I published an article on several financial websites titled "Gold Bears Have Two Weeks to Live." In it, I contended that we would see a big move in gold stocks to the upside that would mark the start of the next major bull run in gold. However, last week, gold stocks dipped, causing some to question whether or not we are going to get a big rally. Has my outlook changed?

It has been my contention for the past several months that the XAU and HUI have been preparing to begin a new leg of their bull market. For over a year now, both gold stock indices have been consolidating in a range between their 200-day bollinger bands. We've seen dips and rallies during this time, but all action has been confined to a trading range that has been growing tighter.

We've seen two such successive long trading ranges after intermediate-term tops in the past five years. When both of those came to an end, huge returns in gold stocks followed over the six months that followed.

Gold stocks ended those trading ranges and began new bull runs once the XAU broke above its 200-day bollinger band after the band had been growing narrow for the previous few months, and once the XAU/gld ratio broke above a downtrend resistance line that had kept it locked down for at least eight months.

Now, the 200-day bollinger bands are more narrow then they have been in seven years and the XAU/gld ratio appears to be poised to break above of its downtrend resistance line sometime in the next few weeks.

A few weeks ago, I thought we would see the XAU begin to rally above its 200-day bollinger band. That's why I talked about gold bears having two weeks to live. This recent dip in gold stocks has likely just given them another week or two of breathing room.

We're about to find out who's right, me or the bears.

Last week, gold stocks fell to major support. The XAU closed Thursday right on a support trendline and a 2/3's retracement level of the March low and April peak, but more importantly for the short-term, right on its lower 10-day bollinger band. One of two things is going to happen. It is either going to bounce off of this band in the next few days or else close below it.

A bounce here would be consistent with gold stocks putting in a bottom similar to the ones in January and March. It would set the XAU to break out of short-term resistance, which is 138 1/4, the point of the XAU's upper 10-day bollinger band and downtrend line connecting the April and May highs, and run back up to the the 150 area. The intermediate-term picture would remain bullish.

However, if the XAU were to close below 134 1/2 it would close below support and we'd likely get another leg down in gold stocks. This would be troubling. Why? Because there is no real support below these levels until the March low. But for the time being, all things seem to point to a rally. For one thing, the gold stocks have performed well relative to the metal during this dip. The XAU/gld ratio has held its ground. This is important because it tends to lead the action in both gold and the gold stocks.

So, gold stocks fell down to major support last week and are positioned in a way that they could begin a major breakout. If they break out to the upside at these levels and then rally up to their April highs, we should see the very beginning of the next bull leg of the bull market unfold right before our eyes.

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Michael Swanson

Author: Michael Swanson

Michael Swanson,
www.wallstreetwindow.com

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