Potential Reversal Could Lead to Huge Buying Opportunity - Mike Swanson(10/12/07)
by Mike Swanson on Fri, 2007-10-12 10:09.
Yesterday we saw a potential reversal in the market. The Nasdaq rallied up over 20points and then closed down almost 40 points. When you see a market breakout to new52-week highs after going up for weeks and making a big move to the upside during the dayonly to close deep in the close you have a potential reversal. At the same time the XAUtraded all of the way up to 182 and dropped almost 10 points. It then bounced into theclose to finish the day at 176.67. The markets have been rallying since the August bottomwithout any pullback of any significance. At the same time Investor Sentiment has gottenextremely bullish, with the number of people calling themselves bulls in the InvestorsIntelligence Survey over 60%. This has gotten a bit larger at times, but is the level wesaw at the July top.
The markets are in a position in which they will either continue to rally and have awild 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 boughtand sold some gold positions over the past week(notifying
The XAU has support at 173, the point of its breakout and resistance level that has heldit in place over the past month. After that support is at 1685.56, the point of its 20-daymoving average and then down to the the 159.20-160 area, the 1/3 retracement level of theAugust low and October 182 high. If yesterday's action was an important reversal then theXAU could easily pullback down to the 160 area. By the time it got there the 50 day movingaverage would also be near this point. In past bull runs the 20 and 50-day moving averageshave been key areas of support. Also a move down to 160 would be an 11% correction that Ihave mentioned as normally occurring after the XAU first breaks above its 200-daybollinger band at the start of a new bull run. I had thought we would see a correctionlike this off of the 173 area, but it may be that the XAU decided to move higher up to 182before having this 11% correction.
The bottom line is if the XAU closes below 173 over the next few days we can expectcontinued selling that will take it below 170. We would then have to look for signs of abottom 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 wesaw 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 discussedthe market action. You can listen to it by clicking
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WSW Podcast: Manic Market- Special Guest Dave Skarica.
