Gold Trying to Make a Bottom

By: Michael_Swanson

After falling 40 dollars Monday morning and dragging the HUI down 20 points there are some short-term technical signs that gold may be near a bottom of some sorts. First gold finally fell down hard one morning to start to catch up with the steep drop we have seen in gold stocks. Gold also fell down to its 65-week moving average, which has been its long-term support level for the past six years.

First on a very short-term basis the gold stocks started to outperform the metal Monday after getting totally crushed in the morning. At around 11:00 AM gold fell 20 points in about an hour and a half. During this time though the GDX/gold, XAU/gold, and HUI/gold relative strength ratios actually turned up a bit as at that point in the day gold stocks actually held up while the metal continued lower - of course this happened after vastly underperforming the metal for the past two weeks and Monday morning on the open.

But that is the type of action you start to see at gold bottoms. It is key because these ratios tend to define the trend for gold and gold stocks, because the gold stocks tend to lead the action in both. The relative strength ratios have been in sharp decline in the past few weeks, but yesterday finally started to hold up while gold made a new low during the day.

As you can see the 65 week moving average for gold has acted as support since 2002. It currently stands at 80.02 on the GLD while the GLD hit a low of 80.62 Monday - which is close enough to consider this a test of support. If the gold bull market is intact then this level will hold. If it is not then we should still get a bounce off of this level for several weeks before it moves below it. Therefore I think the odds favor some sort of bounce in gold stocks to begin in the next few days - or even starting today.

I expect we'll see a 6-8% bounce from here in the metal, which will take gold stocks up 6-16%.

Right now I have 360 as a likely stopping point for the HUI for a rally from here. That is the equivalent of 41 on the GDX. This is the point of the downtrend resistance line connecting the July highs so even if gold stocks are ultimately going to go higher after that I'd expect a pullback or retest of the lows from this level to happen first.

It will be important for the gold stocks to outperform on a rally. That would be a big positive sign - if they don't then the rally should be used to sell out as it would be a sign that the 65 week moving average for gold will likely be broken.

But the key here is we've seen a brutal correction in gold stocks over the past two weeks. On Monday there were some intraday technical signs that suggest that this correction is in its final round and that some sort of rally should ensue. Whether such a rally would be nothing but a countertrend move in a larger decline or a final bottom I cannot say from this analysis of the very short-term action in the market. We'll have to see how things unfold from here to determine that - assuming these signs that a bottom is at hand turn out to be correct.

---What you have just read is an edited version of a flash post sent out to WallStreetWindow Power Investor Members yesterday afternoon at around 2:45 PM . To receive my future articles, with stock picks and actionable investment ideas, sign up to my free email list: click here .

By Michael Swanson
WallStreetWindow.com

Mike Swanson is the founder and chief editor of WallStreetWindow. He began investing and trading in 1997 and achieved a return in excess of 800% from 1997 to 2001. In 2002 he won second place in the 2002 Robbins Trading Contest and ran a hedge fund from 2003 to 2006 that generated a return of over 78% for its investors during that time frame. In 2005 out of 3,621 hedge funds tracked by HedgeFund.Net only 35 other funds had a better return that year. Mike holds a Masters Degree in history from the University of Virginia and has a knowledge of the history and political economy of the United States and the world financial markets. Besides writing about financial matters he is also working on a history of the state of Virginia. To subscribe to his free stock market newsletter click here .

Copyright © 2008 Michael Swanson - All Rights Reserved.

Disclaimer -

WallStreetWindow.com is owned by Timingwallstreet, Inc of which Michael Swanson is President and sole shareholder. Both Swanson and employees and associates of Timingwallstreet, Inc. may have a position in securities which are mentioned on any of the websites or commentaries published by TimingWallStreet or any of its services and may sell or close such positions at any moment and without warning. Under no circumstances should the information received from TimingWallStreet represent a recommendation to buy, sell, or hold any security. TimingWallStreet contains the opinions of Swanson and and other financial writers and commentators. Neither Swanson, nor TimingWallstreet, Inc. provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained on any TimingWallStreet publications may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of TimingWallStreet, Michael Swanson or other financial authors are not necessarily indicative of future performance.

TimingWallStreet does not represent the accuracy nor does it warranty the accuracy, completeness or timeliness of the statements published on its web sites, its email alerts, podcats, or other media. The information provided should therefore be used as a basis for continued, independent research into a security referenced on TimingWallStreet so that the reader forms his or her own opinion regarding any investment in a security published on any TimingWallStreet of media outlets or services. The reader therefore agrees that he or she alone bears complete responsibility for their own investment research and decisions. We are not and do not represent ourselves to be a registered investment adviser or advisory firm or company. You should consult a qualified financial advisor or stock broker before making any investment decision and to help you evaluate any information you may receive from TimingWallstreet.

Consequently, the reader understands and agrees that by using any of TimingWallStreet services, either directly or indirectly, TimingWallStreet, Inc. shall not be liable to anyone for any loss, injury or damage resulting from the use of or information attained from TimingWallStreet.

© 2005-2012 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Comments