Potential Reversal Could Lead to Huge Buying Opportunity

By: Michael Swanson | Fri, Oct 12, 2007
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Yesterday we saw a potential reversal in the market. The Nasdaq rallied up over 20 points and then closed down almost 40 points. When you see a market breakout to new 52-week highs after going up for weeks and making a big move to the upside during the day only to close deep in the close you have a potential reversal. At the same time the XAU traded all of the way up to 182 and dropped almost 10 points. It then bounced into the close to finish the day at 176.67. The markets have been rallying since the August bottom without any pullback of any significance. At the same time Investor Sentiment has gotten extremely bullish, with the number of people calling themselves bulls in the Investors Intelligence Survey over 60%. This has gotten a bit larger at times, but is the level we saw at the July top.

The markets are in a position in which they will either continue to rally and have a wild parabolic melt up or are going to pullback down and digest their recent gains, thereby paving the way for another more healthy move up.

If we do get a pullback it will be a great buying opportunity for gold stocks. I bought and sold some gold positions over the past week(notifying WSW Power Investor members of the timing of these trades), but if we see gold stocks pullback from here I will be able to buy and hold.

The XAU has support at 173, the point of its breakout and resistance level that has held it in place over the past month. After that support is at 1685.56, the point of its 20-day moving average and then down to the the 159.20-160 area, the 1/3 retracement level of the August low and October 182 high. If yesterday's action was an important reversal then the XAU could easily pullback down to the 160 area. By the time it got there the 50 day moving average would also be near this point. In past bull runs the 20 and 50-day moving averages have been key areas of support. Also a move down to 160 would be an 11% correction that I have mentioned as normally occurring after the XAU first breaks above its 200-day bollinger band at the start of a new bull run. I had thought we would see a correction like this off of the 173 area, but it may be that the XAU decided to move higher up to 182 before having this 11% correction.

The bottom line is if the XAU closes below 173 over the next few days we can expect continued selling that will take it below 170. We would then have to look for signs of a bottom to buy at the 168 or 160 area.

If we drop down to these levels and bottom I expect a huge rally to take place like we saw from August to this recent peak that will take it beyond the 200 level.

Yesterday Dave Skarica and I published a podcast after the close in which we discussed the market action. You can listen to it by clicking here. In the podcast we discussed yesterday's market action in greater detail. To subscribe to Dave's Addicted to Profits go to this link.

You can listen to future podcasts as soon as they are recorded, instead of 24 to 48 hours later when I post them on the website, by subscribing directly to the podcast's RSS feed by clicking here.

An RSS subscription allows you to receive the podcast through your Ipod or RSS feed reader. I'd like to encourage you to subscribe to the podcast because the more subscriptions to the RSS feed we have, the higher the podcast will be ranked in feed directories, thereby attracting more listeners to the program. We pay the costs for this podcast which keeps it free for you, so your subscription to the podcast would be a great way to help us out. And if you use podcast directories yourself, please don't hesitate to recommend us.

WSW Podcast: Manic Market - Special Guest Dave Skarica.



Michael Swanson

Author: Michael Swanson

Michael Swanson,

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