On Tuesday gold briefly dipped below $430 an ounce today and the XAU fell below 93. The correction in gold that started two weeks ago is continuing. BUT, I think there are strong reasons to believe that the XAU has made an important new support level today.

Let's look at the metal first. Current support levels are at 430, 427.57, 425, and then 421, which is the point of the 65-week moving average on gold. This has acted as support ever since the gold bull market started in 2002.

I think we could see gold ultimately dip down to 425 or even 421 before it puts an end to this correction. It will likely take a move down to 425 for the commercials to close out enough short positions for the Commitment of Traders Report to get bullish. Gold went down to 428.50 today, so that isn't really much of a drop from here. Friday's Commitment of Traders Report should give us an idea of whether 425 or 421 will be the ultimate bottom.

The XAU has support at 92 and then 89.40. 92.03 is the 1/3 retracement level of the rally in the XAU that began in May. Today, the XAU fell to 92.68 and then rallied into the close, creating a short-term reversal candlestick pattern. In other words, while gold fell below 430 after having already taken out its 1/3 retracement level a week ago, the XAU held support and rallied.

This 92 level is likely to act as powerful support on the XAU. Even though I think that gold could probably bounce here for a few days and then go back below 430, the XAU is likely to just hold its support level. If it ends up breaking 92, it will go below 92 only briefly.

Everything still looks bullish. Gold stocks and the XAU are outperforming the metal on this correction in gold. Like I just noted - the XAU has held its 1/3 retracement level while gold has not.

The overall action is working out just as I expected and hoped it would. Although the XAU has dipped below 98, it is outperforming the metal and the overall pattern is intact. Go back to what I wrote in a special members only bulletin I posted on 8/12/05:

"Now, even though I think that gold is likely to pullback over the next few weeks, I don't think it is something you should get overly concerned about. I'll show you why with a chart of the XAU."

"Since May, the XAU gold stock index has been soundly outperforming the price of metal, rising quickly when the metal is up and holding up when the metal has pulled back."

"Take a look at the action in the XAU during June and July and compare it with gold. Notice what it did when gold pulled back in July. Spend some time on this. Print out this article and take a closer look if you think that will help."

"While gold dropped 24 points the XAU barely fell at all, holding above 90 throughout the entire gold pullback. In hindsight this was an incredible display of strength and not surprisingly a breakout above 95 up to 100 took place on huge volume right after the pullback in gold came to an end."

"Now, remember how you felt during this time. If you were holding gold stocks, the drop in gold may have scared you a bit. I personally had a large position in gold stocks and ended up selling them one day to prevent losses only to realize that the technical picture was actually improving. I bought them back the very next day."

"With gold falling the past few days and the news that there is a huge commercial short position on the metal you might feel timid again just like you may have been in June and July. But just like June and July, after the metal correction is over, the XAU will be blasting off again to new highs. You don't want to get shaken out of your position because of your fears only to see gold stocks go up after you sell."

"Study the charts more closely. While the June and July correction was happening, gold would fall to certain support levels, try to hold them, fail and fall lower. It would then repeat this pattern again and again until finally it bottomed at 417 as the commercials closed their short positions. Now look at how the XAU acted during this time. When gold had down days the XAU would also fall, but on days when gold held up, the XAU would strongly bounce. While gold was stair stepping down, the XAU was holding the 90-91 level like a rock."

"The XAU outperformed gold during the last gold pullback. It is doing the same thing now and that means any pullback here is likely to have the same characteristics as the last one. Despite a probable drop in gold to 430 or 425, the XAU is likely to hold its support levels - which are now 95 and then 92.33. It will do this by bouncing hard on days when gold is up. And then as soon as gold finishes its correction, the XAU will be making a new high to rally to the 105-110 level."

"With gold now only a few points from its 434 support level, it is liable to bounce towards the beginning of this week, helping pop the XAU for a day or two, and then fade down to 430 by the end of next week or early next week to move toward its next bottom."

I quoted what I wrote last week here, because I want you to see that things are unfolding just the way we want them to. There is a good chance that today marked the bottom in the XAU. However, I want to be sure of that before I make any more gold stock buy recommendations. I want to see how gold and the XAU act over the next week. If we see gold bounce here and then fall back down to today's low or below it while the XAU holds up, then we'll know that it is time to pounce. Or if we see gold just drop down to 425 from here while the XAU holds up we'll know that is the bottom too.

Tomorrow or Friday I plan on highlighting some new gold and exploration stocks that I am watching so that you will be ready when it is time to buy. I will probably put one on the recommendation list.

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