Yesterday we saw a dramatic sell-off in gold stocks and gold in the morning. By the close the XAU reversed and went into the green while gold finished only a few points in the red. It looked like a key reversal day for gold stocks, but was it?

I've been watching the action carefully hour by hour and wasn't convinced enough to buy. I need confirmation to tell me that this was a bottom. If gold had fallen at some point yesterday while the stocks just sat there and firmed up then I would have bought. But that didn't happen. Instead both gold and the stocks bottomed during the day and went up together into the close.

Yesterday morning I wrote that gold stocks were entering a "buy zone" and that I was in cash(well not totally - I still own a few on my WSW Power Investor small cap list), waiting, and ready to buy. Well after I wrote that gold gapped down and slid all day long. By the close it dropped 20 points. More shocking though the XAU fell 8 points and the HUI had a 20 point sell-off. I was hoping that gold stocks would hold up while the metal dropped, thereby giving me a buy signal, but the opposite happened.

This suggests that there is more downside to go. We haven't hit bottom yet.

Last night I looked through my charts and figured that another big down day in the metal this morning would likely bring us the bottom. All we need now is to see the metal down big and the stocks firm up and we can safely get in this market. You know a key reversal day But so far this morning that isn't happening as gold is trading up 3 points as I write this.

Yesterday the XAU and HUI both closed up fractionally while gold fell 3 1/2 dollars and is now trading down 4 points in pre-market action. The action strongly suggests that gold stocks bottomed Monday of last week, because the action in the gold stocks tends to lead the action in the metal. It is bullish when the stocks outperform the metal as they did yesterday and bearish when they lag while the metal rises. The XAU/gld and HUI/gld relative strength ratios have been firming up all week.

For the past several days I've had a hunch that gold stocks bottomed last Monday, but have not acted on it, because I needed confirmation like we are seeing now. Short-term though it does appear that further weakness in the stocks and metal are likely. Gold is breaking a short-term support level today and the XAU and HUI are about to break short-term support uptrend lines on their 60 minute charts. This suggests a short-term pullback for 1-3 days should occur. This shouldn't shock you, because gold needs to digest its recent move before it can decisively rally above $600 an ounce.

I'm back! I've been doing a lot of traveling lately and I'm glad to finally settle in for a while. Travel has been good though. I've gotten to blow off some steam and have some fun. But I've also met a lot of great contacts that I'm sure will benefit us all in this upcoming year.

Early in September, I was at the Las Vegas Gold Investment Conference and last weekend I spoke at a gold conference in Toronto. This one was hosted by Joe Martin and Cambridge House. It was nice to meet some of you there. Although I spoke for a little bit, my main reason for going was to visit some of the companies I have invested in and to get more investment ideas. At this moment I have about a dozen promising small-cap gold stocks that I am doing more research on. My plan is to add a few of them to the small-cap list over the next few weeks.

Did he really say that?

In the past two weeks I was treated to two particularly moronic public statements from market experts.

Last week, during an interview on CNBC, Dennis Gartman, editor of the highly regarded Gartman Letter, asserted that the storage currency of choice among drug traffickers, arms dealers, and the Russian Mafia had switched from $100 dollar US bills to €500 Euro notes. Gartman proclaimed the development to be bullish for the U.S. economy and bearish for the Euro zone. Say what?

Gartman’s “logic� was that when the dormant $100 bills sitting in attaché cases, safety deposit boxes, and mattresses returned to America, the additional spending would boost the US economy. Conversely, he asserted, the removal of euros from circulation would hurt the euro-zone economies. Basically, Gartman’s comments boiled down to the belief that economic growth can be created by introducing more money into circulation. Or, more precisely, that inflation creates prosperity.

Written by Matthew Frailey: matt1@breakpointtrades.com

Welcome members and guests of wallstreetwindow.com! I’ve know Mike Swanson for years and I’m happy to share my extensive technical knowledge with you on Mikes great new website.

A little about myself:
My forte is technical analysis and as you will see, this letter if VERY technical oriented. My work has been published at Zealllc.com and 321gold, etc in the past. I am one of the originators of the HUI/Gold ratio buy/sell mechanical system!

I have called very major buy and sell in the precious metals area, as well as called the general market bottom in early 2003. I also called the market top in May of this year. Also, I called to top in commodities this year; I called for a top in oil in late July, as well as a top in gasoline and other general commodities. Also, while everyone else was bullish, I called a top in gold stocks before the big recent crash:

The Dow Jones Industrial Average is nearing multi year and all time highs. Regardless of all the background noise, this is an extremely important technical position for the Dow. Its technical position is illustrated on a monthly 10-year chart showing that the 1999 high of 11,750 is being approached as of Wednesday evening’s close at 11,613. In addition, the May of 2006 high of 11,671 is also being challenged, and by the time you read this, these highs may have already been breached. On the other hand, failure to decisively retake these technical levels over the next few weeks would be viewed with important bearish technical significance in the market.