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Gold Stocks and the Head and Shoulders
Myth |
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Gold is poised once again to breakout and go
higher. On Thursday, the XAU gapped up to its upper resistance
trendline and resistance 144-145 zone. It fell hard on Thursday
and then reversed to the upside on Friday.
I responded to the Thursday drop by writing
the following about gold stocks on Friday morning:
"If they firm up today or Monday then
they will set themselves up for a possible breakout next week.
If you notice the resistance and support trendlines are coming
together and lining gold stocks up for another big move -
which should happen in 5-10 trading days. The most bullish
action would be to see the gold stocks go back up and then
just sit there for a few days."
This is exactly what appears to be happening.
And if it continues, then gold stocks will break out this
week or early next week. Frankly, I don't see any reason for
them not to break out and rally ahead of this coming Federal
Reserve meeting. A close above 144 and the 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 CNBC which has dropped gold
from its radar screen, but even gold bugs. But in a way that's
understandable because so many got beaten up in the last dip
in gold. And when a correction occurs in a bull market, it's
not the drop in value of their holdings that disturbs investors,
but the mental anguish they go through. They stop seeing the
bull market 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 calling for a huge correction
and telling people to get out of gold stocks. I know that's
hard to believe - just on the cusp of what should be a giant
rally they are telling people to exit the market - but that
is exactly what is happening. I'm not going to name names,
but one big myth being passed around is that gold stocks have
a giant bearish head and shoulders formation.
There are a few gold bugs shouting that there
is a giant head and shoulders pattern on the XAU and HUI that
will end in disaster for people holding on to gold stocks.
The problem with this kind of thinking is that even though
it looks like a possible head and shoulders, 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 be negated. In
fact, if the XAU were to rally back up to its 52-week high
you would actually have a bullish reverse head and shoulders
pattern formed - and those lead to incredible bull runs. Let's
look at two examples:
Back in the spring of 2002, there were people
seeing a bearish head and shoulders pattern on the XAU. The
same thing happened last summer. But obviously these patterns
never completed themselves. They were simple mirages, projections
of psychological fear created by violent corrections in the
gold market.
One thing that has kept me very bullish about
gold stocks is the fact that so many of them never fell below
their 150-day moving average on this last correction. The
150-day moving averages for these stocks are now sloping up.
I've never seen this before in previous gold corrections.
The last time I saw this was with oil stocks last year. To
see what gold stocks 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. Start now:http://www.wallstreetwindow.com/weeklygold.htm
****
Michael Swanson
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