Second Gold Stock Breakout Attempt Coming

July 25, 2005

Two weeks ago the XAU gold stock index attempted to breakout and begin a run to its 52-week highs. After bottoming in May, the XAU rallied up to 95 where it encountered triple resistance - its 150-day moving average, its 50% retracement point of the November top and May bottom, and a powerful downtrend line connecting the November and March highs.

This 95 resistance level has kept the lid on the XAU and gold stocks for over 6 weeks now. Two weeks ago it looked as if it was going to breakout. The XAU had held up then for several weeks while gold underwent a correction. Instead of crashing with the price of the metal (which had plunged over nine dollars in a single day at one point) the XAU shrugged of the correction. What's more, the index consolidated and traded in a narrow range, which is almost always the prelude to a large move.

On July 12, the XAU gapped up and moved above 95 only to stop within .03 of its July 95.10 peak. Two days later the price of gold dropped again, falling below $420 an ounce. The XAU finally got dragged down by the gold sellers and briefly fell below 90 last Tuesday. It has since snapped right back and is now less than $2 away from its critical 95 resistance level.

The XAU is now gearing up to test the 95 level again and this time will likely succeed in breaking it. Why now? Because this time the short-term correction in gold appears to be over. Gold succeeded in bouncing off of its 65-week moving average at 417. This is important because the 65-week moving average has held as support throughout the past four years.

What's more, gold commercial traders have been rapidly closing out their short-positions over the past few weeks. The trend for gold is now up and that means that gold will no longer pressure the stocks.

What we have seen over the past two weeks is a classic short-term correction in the XAU during a bullish uptrend. Bullish corrections for the XAU are characterized by the XAU continuing to outperform the metal, which it is now doing, and they are quick and furious. The stocks drop fast but they snap back even faster. The problem for most people though is that the drops take them by surprise and shake them out of their positions.

This is not the time to be scared, it is time to be bullish. Everything is lining up for this to be more than simply a nice rally in gold stocks like we saw last summer. Gold stocks are now poised to go to their 52-week highs before gold does. We haven't seen this happen in almost two years and it is that type of action that brings major legs up in gold. This time it will bring phase two of the gold bull market.

Things seem slow right now, but don't let that fool you. Behind the scenes, smart money is accumulating gold stocks ahead of the next big rally.

I am now personally holding a large gold position that I bought in three stages since the May bottom in gold. It is time for you to buy any gold stocks that you are thinking about and to revaluate your entire gold portfolio. You should sell stocks that have lagged since May and rotate that money into the stronger performing issues. Now is the time to position yourself.

 

To find out what gold stocks Mike Swanson holds and plans on buying subscribe to his free Weekly Gold Report at http://wallstreetwindow.com/weeklygold.htm

Gold is impervious to rust.