Yesterday I posted an article saying that I thought gold likely put in a bottom last week and that I was looking for gold stocks to make up half of their recent losses, with a target of the 450-460 area on the HUI gold stock index. After that I expect gold stocks to pullback, probably with the HUI falling down back to its lows of last week, and then entering a period of consolidation that would probably last through much of the summer. The reason I see this happening is that many of the big cap stocks have been beaten down so much in the past six weeks that they will need to go through a period of consolidation before they can breakout to new 52-week highs and have a sustainable rally.

As as result I believe that the big cap gold stocks are worth only a trade for a rally up to the 450-460 area of the HUI while better opportunities now lie in the smaller junior stocks where true bargains can be found. The stock I'm recommending today for instance is poised to go into production and produce over $300 million in revenue and has a market cap less than $176 million. Stocks such as this can breakout and just go higher all year.

This morning I went back and looked at seasonal patterns for gold and the seasonal pattern seems to match the projections I am making from the overall chart patterns. It is worth knowing the seasonal patterns to the markets. Most people know the adage of "sell in may and go away" when it comes to the stock market, but there are even stronger seasonal patterns when it comes to commodities. There are traders who make lots of money by simply playing seasonality.

As you can see gold has a tendency to make a peak in the April-May time period and then consolidate through the end of August and then breakout in September and have its best months through the end of the year. This seasonal pattern held true in this gold bull market except for last year when the whole stock market experienced its first subprime meltdown last August. If it wasn't for that the same seasonal pattern probably would have held true again.

If the pattern repeats then we can expect gold stocks to rally until the end of the month and then retest their lows, maybe even making a slight minor low, in June or July and then base for a few weeks and breakout at the end of August or September to rally through the end of the year. This would fit the scenario I came up with yesterday from the overall gold and gold stock chart patterns.

What this means is that traders looking for stock picks can buy large cap gold stocks now and sell at the end of the month with a mind of buying in the middle of the summer while investors should use the current dip to buy into junior stocks with real assets and cheap valuations as investments now. Investors want to use this dip to begin building a position and should look for a future dip in the summer as a chance to add on or increase their exposure to gold stocks. I'll be recommending more junior mining stocks over the next few weeks.