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November 11, 2007

Looking for a Buy Point This Week for Gold Stocks
by Michael Swanson

Dear Investor,

In last weekend's members only monthly newsletter I said that I was worried that we would see the broad market follow the weakness we have seen in bank stocks and the advance/decline the past few weeks and break down. We indeed got that breakdown and the selling picked up as the week went on. Going into this week we have the potential for a key bottom and another great buy point for gold stocks. Once the market reverses we should see a rally that goes into the end of the year and that rally will be led by mining stocks. I expect the XAU to rally another 15-20% over the next two months.

I want to make some observations about last week:

1)The speed of the correction in the broad market has been intense over the past week and so has the volume.

In the past seven days the DOW has fallen 7.2%. I want you to compare the action in these past seven days to the action in the five days preceding the August bottom. I've highlighted both of these areas in blue above. In those five key days in August the DOW fell 6.5%. So far on this drop the volume has actually been greater than it was before the August bottom. The intensity of the drop so far compares with what saw in August.

The same goes for the Nasdaq. In fact in the past seven days of the Nasdaq has fallen harder and on greater volume during the five days before it bottomed in August.

If you recall back in August the day before the market bottom I wrote a long article in which I said that the market will either bottom on that day or crash. Indeed we saw a crash like day as the market was down 344 points at one point on the day it bottomed and if it had not turned around the selling would have snowballed into a 400 or 500 point plus down day.

We are in a similar situation now as we were back in August the day before the market bottomed. What is similar is that the market has been falling hard for the past few days and the correction has picked up intensity. The market is extremely oversold. If the selling continues for another day at the same intensity then there is a risk of the market crashing. The market almost crashed in August, but turned around at the last second, thanks to Fed intervention. We would be in the same situation again if we don't see a bottom or bounce Monday.

2)Unlike during the August correction Mining stocks are now asserting powerful relative strength.

Since the S&P 500 peaked in October out of 239 Worden TC2007 stock market sectors only 41 have a positive return. The top of this list is dominated by mining sectors and then energy sectors. In fact Worden's silver sector is up 10.13% and its gold sector is up 7.52% while the S&P 500 has declined 8.9% since it peaked in October.

If you look at the above chart for the gold sector and take a look at the red relative strength line you'll see that is has been trending up. This means that gold stocks are outperforming the rest of the market during this correction. During the correction in August they actually fell harder than the rest of the market.

Sectors that hold up the best when the market drops tend to lead the market after the bottom. In August big cap tech stocks were among the stocks that held up the best during the correction and they were subsequently among the best during the rally. Really just up until a few days ago.

Mining stocks have been performing well during this correction and I expect them to therefore totally take off once it is over. In fact they have held up surprisingly well. The XAU is currently only 4.6% off of its high. During bulls runs it is nothing for it to have temporary dips of 10%. Even with the market selling of like it has it dropped hardly at all.

Once the correction is over I will add more mining stocks to the WSW Power Picks list.

I am looking for a buy point this week and am on the lookout for two market scenarios:

1)The market is extremely oversold on a 60 minute basis so the most likely scenario is that the market simply bounces tomorrow after the opening. Unless there is heavy selling first, I doubt a simple bounce off the opening will mark a bottom at this point. Even though the market has fallen fast sentiment according to the Investors Intelligence survey isn't overly bearish yet. The drop so far has been fairly orderly. I'd like to see a true panic washout similar to what we saw in August to be able to say we bottomed. If we bounce it will likely simply fade a day or two later. The market would then break its recent lows and then bottom a day or two later.

2)The market falls hard tomorrow and that drops leads to a panic washout. If the DOW fell over 300 points Monday that could be enough to cause a panic washout, but I think it more likely that it would bottom the next day.

For signs of a bottom washout I like to watch the VIX, which measures the premium investors pay for volatility, to spike up into the mid-30's and then reverse by the close. If the market were to fall from here it would be setup to do this within the next three trading sessions and most likely on Tuesday. Otherwise it would have to bounce and then make new lows to cause enough panic to get into the market to cause the premium paid for volatility in the options market to expand.

In the end this week is going to end up providing a great entry point for gold stocks.

Once the market puts in a bottom I will be adding more stocks to the WSW Power Picks list. Those who have signed up to the service are already enjoying the large gains from these stocks. With new stocks about to be added on to it for the first time now is a great time for you to take a risk-free trial.

We just started this service a month ago so if you sign up now you will be one of the first inaugural subscribers to it. It is different from the more expensive WSW Power Investor, which provides daily commentary on the stock market, because it focuses simply on identifying those stocks that can provide you with enormous profits. Since you are taking that chance we are going to offer you a money back 30-day trial and a price much reduced from the WSW Power Investor service. If you aren't satisfied in 30 days just let us know and we'll give you your money back. You have nothing to risk and everything to gain.

And there isn't a better time then today to become a subscriber. Things are moving fast so you need to act quickly. To join click here.

Michael Swanson,
WallStreetWindow.com

Disclaimer: Michael Swanson is the President of USA Capital, Inc., which provides management, support, and research for institutional investors, hedge funds, and mutual funds. The ChartWizard is also an employee of USA, Capital, Inc. Both Swanson and employees and associates of USA Capital, Inc. may have a position in securities which they mention on WallStreetWindow or any of its services. In such cases, appropriate disclosure is made. Under no circumstances should the information received from WallStreetWindow represent a recommendation to buy, sell, or hold any security. WallStreetWindow contains the opinions of Swanson and the ChartWizard and is provided for informational purposes only. Neither Swanson, the ChartWizard, nor TimingWallstreet, Inc., which owns WallStreetWindow, 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 WallSteetWindow may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of WallStreetWindow, the ChartWizard, or Michael Swanson are not necessarily indicative of future performance.

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Copyright © 2004-2009 Michael Swanson

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