Gold is poised once again to breakout and go higher. On Thursday, the XAU gapped up to itsupper resistance trendline and resistance 144-145 zone. It fell hard on Thursday and thenreversed to the upside on Friday.
I responded to the Thursday drop by writing the following about gold stocks on Fridaymorning:
"If they firm up today or Monday then they will set themselves up for a possiblebreakout next week. If you notice the resistance and support trendlines are comingtogether and lining gold stocks up for another big move - which should happen in 5-10trading days. The most bullish action would be to see the gold stocks go back up and thenjust sit there for a few days."
This is exactly what appears to be happening. And if it continues, then gold stockswill break out this week or early next week. Frankly, I don't see any reason for them notto break out and rally ahead of this coming Federal Reserve meeting. A close above 144 andthe XAU will begin a rally to its 52-week high.
The crazy thing is that everyone is silent about this possibility. It's not just CNBCwhich has dropped gold from its radar screen, but even gold bugs. But in a waythat's understandable because so many got beaten up in the last dip in gold. And when acorrection occurs in a bull market, it's not the drop in value of their holdings thatdisturbs investors, but the mental anguish they go through. They stop seeing the bullmarket for what it is and start to fear more losses.
They get scared of things that go bump in the night. A few prominent gold bugs are callingfor a huge correction and telling people to get out of gold stocks. I know that's hard tobelieve - just on the cusp of what should be a giant rally they are telling people to exitthe market - but that is exactly what is happening. I'm not going to name names, but onebig myth being passed around is that gold stocks have a giant bearish head and shouldersformation.
There are a few gold bugs shouting that there is a giant head and shoulders pattern on theXAU and HUI that will end in disaster for people holding on to gold stocks. The problemwith this kind of thinking is that even though it looks like a possible head andshoulders, for the pattern to be complete, the XAU would have to make a close below 120.
If the XAU closes above its upper resistance trendline then the possible formation will benegated. In fact, if the XAU were to rally back up to its 52-week high you would actuallyhave a bullish reverse head and shoulders pattern formed - and those lead to incrediblebull runs. Let's look at two examples:
Back in the spring of 2002, there were people seeing a bearish head and shoulders patternon the XAU. The same thing happened last summer. But obviously these patterns nevercompleted themselves. They were simple mirages, projections of psychological fear createdby violent corrections in the gold market.
One thing that has kept me very bullish about gold stocks is the fact that so many of themnever fell below their 150-day moving average on this last correction. The 150-day movingaverages for these stocks are now sloping up. I've never seen this before in previous goldcorrections. The last time I saw this was with oil stocks last year. To see what goldstocks are likely to do going forward just look at what the oil stocks did last year.
To find out what gold stocks Swanson is buying now join his free weekly gold report. Startnow:http://www.wallstreetwindow.com/weeklygold.htm
