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How to Tell When Gold Stocks Have Finally Bottomed

By Jeff Clark
Thursday, October 5, 2006

Gold stocks are poised for a dead cat bounce – but that’s all it’ll be.
 
If you take a dead cat and throw it off the top of the Empire State Building, it will bounce after it hits the ground... at least that’s the theory.
 
Wall Street applies the same theory to stocks that have fallen several stories as well. Eventually, stocks that have suffered a huge decline eventually bounce back a bit. And traders, being traders, describe that action as a “dead cat bounce.”
 
Gold stocks definitely qualify as stocks that have fallen too far too fast, and we’re likely to see a few golden cats bouncing in the next few days. So, nimble traders can probably scalp a decent trade from the long side. But don’t overstay your welcome. Dead cats don’t stay airborne for too long before falling back to the ground.
 
Fortunately, the ground isn’t too far below current prices.
 
The Gold Bugs Index (HUI) is awfully close to achieving the downside price target I told subscribers about after the sector peaked in May. With any luck, we’ll drift down to that target within the next few weeks. That weakness should give us a real opportunity to buy gold stocks for the long term.
 
For now, however, investors are still a little too willing to jump into gold at the first sign of a turnaround. And that’s still a reason to be cautious.
 
But we’re getting close.
 
Take a look at the following chart that compares gold stocks to the gold metal itself...
 
 
When the chart is moving higher, it tells us gold stocks are outperforming the metal. That’s the best time to be invested in the sector. When the chart is moving lower, gold stocks are lagging and it’s best to sit on the sidelines.
 
Right now, stocks are lagging the metal – and they have been since May. But you can see we’re not too far from the support line of the lows reached back in May of 2003 and June of 2005. Both of those points coincided with major lows in the gold stocks... and the beginning of massive rallies for the sector.
 
You’ll know a bottom is in when the gold stocks start outperforming the metal. Ideally, I’d like to see a day where gold falls $15-$20 overnight, but the gold stocks trade flat or even rise on the day.
 
When that happens, it’ll be time to buy gold stocks and hold on for the next big phase of the Great Gold Bull Market. I’ll keep you updated.
 
Best Regards & Good Trading,
 
Jeff Clark




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Massive rally yesterday produces broadest and longest new highs list in recent memory…
 
Fast food giants McDonald’s, Wendy’s, and Yum! Brands at new highs.
 
Energy stocks still sliding.
 
Incredible strength in retail… American Eagle, Kohl’s, Gap, Men’s Wharehouse, and J.C. Penney on the new highs list.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%