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Market Sentiment At Its Lowest In 10 Months

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Some Signs that Gold Is Trying to Bottom

After falling 40 dollars Monday morning and dragging the HUI down 20 points there are some short-term technical signs that gold may be near a bottom of some sorts. First gold finally fell down hard one morning to start to catch up with the steep drop we have seen in gold stocks. Gold also fell down to its 65-week moving average, which has been its long-term support level for the past six years.

First on a very short-term basis the gold stocks started to outperform the metal Monday after getting totally crushed in the morning. At around 11:00 AM gold fell 20 points in about an hour and a half. During this time though the GDX/gold, XAU/gold, and HUI/gold relative strength ratios actually turned up a bit as at that point in the day gold stocks actually held up while the metal continued lower - of course this happened after vastly underperforming the metal for the past two weeks and Monday morning on the open.

But that is the type of action you start to see at gold bottoms. It is key because these ratios tend to define the trend for gold and gold stocks, because the gold stocks tend to lead the action in both. The relative strength ratios have been in sharp decline in the past few weeks, but yesterday finally started to hold up while gold made a new low during the day.

As you can see the 65 week moving average for gold has acted as support since 2002. It currently stands at 80.02 on the GLD while the GLD hit a low of 80.62 Monday - which is close enough to consider this a test of support. If the gold bull market is intact then this level will hold. If it is not then we should still get a bounce off of this level for several weeks before it moves below it. Therefore I think the odds favor some sort of bounce in gold stocks to begin in the next few days - or even starting today.

I expect we'll see a 6-8% bounce from here in the metal, which will take gold stocks up 6-16%.

Right now I have 360 as a likely stopping point for the HUI for a rally from here. That is the equivalent of 41 on the GDX. This is the point of the downtrend resistance line connecting the July highs so even if gold stocks are ultimately going to go higher after that I'd expect a pullback or retest of the lows from this level to happen first.

It will be important for the gold stocks to outperform on a rally. That would be a big positive sign - if they don't then the rally should be used to sell out as it would be a sign that the 65 week moving average for gold will likely be broken.

But the key here is we've seen a brutal correction in gold stocks over the past two weeks. On Monday there were some intraday technical signs that suggest that this correction is in its final round and that some sort of rally should ensue. Whether such a rally would be nothing but a countertrend move in a larger decline or a final bottom I cannot say from this analysis of the very short-term action in the market. We'll have to see how things unfold from here to determine that - assuming these signs that a bottom is at hand turn out to be correct.

---What you have just read is an edited version of a flash post sent out to WallStreetWindow Power Investor Members yesterday afternoon at around 2:45 PM.

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