I think there is a good possibility that the gold market is at, or very near, a major bottom. Therefore I'm going to begin this weeks newsletter with gold. The general market analysis will be covered after the gold section. Therefore, if you are not interested in gold, you can skip this first section, however I think you should reconsider because I think a major investment opportunity is upon us that only comes along perhaps once a year or every few years.

I have been presenting this chart for weeks now: The gold chart below is very informative and interesting to me as it contains a lot of information: the 65 week moving average, an up trend line, ABCD waves and Elliot Wave, and the commercial trader net short positions.

As you can see, gold has strong support near the up trend line and the 65 week moving average. Also, the commercial traders have been very accurate at predicting tops and bottoms in the gold market. During major tops in the metal, the average net short positions by commercial traders were typically 2 to 3 times higher than during major gold bottoms. Obviously, it is prudent to listen to the commercial traders when playing the gold market

Current Analysis:

Great news, the current commercial net short position has fallen to about 87k contracts! As you can see from the chart below, major bottoms in the gold market typically occur when the commercial net short position falls to the range of 30k to 50k. The current number of 87k is very close to this historical range, and close enough for me to consider this a major bottom for gold. Also, realize that the data from the Commitment of Traders (see the following link: CFTC Commitment of Traders) is for February 1st. and does not include Wednesday, Thursday, or Friday of last week! Gold had a large correction on Thursday and fell again on Friday. In other words, I would expect that the commercial traders covered more of their short contracts on Thursday and Friday when gold was down. Therefore, I think the current short position is probably a lot lower now than the 87k reported on the 1st of the February, it's probably now in the range of 30k to 60k.

Besides the commercial net short position showing a bottom for gold, as you can see other things are lining up into place:

- The mutli year uptrend line is now very close which is major support, a rally off or near this line seems logical.

- Gold has historical support at the 65 week moving average which is also very close.

- Gold appears to be following an Elliot 5 wave correction and is currently in wave 5 which should end any day now.

- Gold also appears to be following an ABCD pattern where D marks the final bottoms.

The above chart, while it contains a lot of information, is quite busy, therefore let's look at a couple of gold charts without all the noise.

As I stated above, the 65 week moving average has been acting as a historical support level. It only seems logical to me that gold will once again rally off this support level.

Let's take a closer look at the Elliot Wave pattern. Over the past couple of weeks, I've stated that I thought gold was following an Elliot 5 wave pattern correction and would soon enter wave 5. It seems I was correct in my assessment. Gold is now clearly in wave 5, and the good news is that wave 5 will end very soon, probably early this coming week.

Note that wave 5 is typically about the same length as wave 1 and always shorter than wave 3. Therefore, I think gold has basically bottomed here, and I don't really see it falling much below $410 if at all.

If you would like to play gold instead of gold stocks to take advantage of this major bottom in the gold market, the gold ETF, symbol GLD, would be the way to do it without having to buy the physical metal.

When discussing the gold market, it is prudent that we also analyze the US Dollar because gold and the US Dollar are inversely correlated with one another.

The US Dollar has rallied since December, which has been the main reason for the pullback in gold. However, as is evident from the chart below, the Dollar has formed a bearish rising wedge, and resistance at between 84.5 to 85 is just overhead.

If the Dollar breaks this wedge to the downside, it will obviously be very bullish for gold, precious metals, and corresponding stocks. However, even if the Dollar breaks out higher, I think it will be stopped at/near the 200 moving average which has been major resistance for the past couple of years.

Another way I like to look at the US Dollar chart is by inverting it: This can be done with any chart in stockcharts by simply adding the symbol $ONE: before the chart you wish to invert. $ONE is equal to 1, therefore by plotting $ONE:USD, I'm simply dividing the US Dollar into 1, which inverts it.

Anyway, as you can see, by inverting the US Dollar chart, there is a major up trend support line fast approaching. This current rally in the Dollar looks as though it will stop at the up trend line and rally off of it, which really means the Dollar would fall - think opposite with this chart.

The next currency of major importance is the Euro: Notice that while the US Dollar is forming a bearish falling wedge, at the same time, the Euro is forming a bullish falling wedge. This is further evidence that the US Dollar will soon break down, as the Euro typically rallies when the US Dollar falls.

Gold Stocks:

Gold stocks typically lead relative to the metal, and the best time to own gold stocks is when they are outperforming relative to the metal.

The HUI / Gold chart ratio below shows strong positive divergence via the MACD. This indicates that gold stocks will soon begin to outperform relative to gold metal.

This next chart of the HUI gold bugs index is a thing of beauty: Notice that major rallies off the multi-year up trend line have occurred whenever the weekly stochastics have been oversold. If this trend continues, then gold stocks have put in a major bottom.

The HUI is also forming a large symmetrical triangle, and I've drawn in red trend lines to show how I think this chart may play out this year. As you can see, I think the HUI could bounce around inside this triangle a couple times before finally breaking out later this year. Of course, the HUI could also break out of the triangle on the this first rally, we'll just have to see.

Also, I have placed the price relative to gold indicator on this chart. As you can see, another major buy signal will be generated once the down trend line on this indicator is broken to the upside. The red arrows represent previous major buy and sell signals based on trendline breaks.

The weekly chart of the XAU is also bullish as it is now very near its long term up trend support line.

The daily chart of the XAU is also bullish as a bullish falling wedge has formed. Also, the price relative to gold indicator shows that the XAU is about to start out performing relative to gold metal.

I've been asked several times which gold stocks I like:  First off, remember that gold stocks will typically move together more than in any other sector, therefore it's difficult to choose losers when the gold sector rallies.

However, I personally like the following gold stocks: NG, DEZ, AUY, RANGY, WHT, WTZ, PDG, EGO, OZN, EGO, GLG, HMY.

Also, remember to look through my list of gold stocks. Look for ones that are performing well relative to gold. I have placed the price relative to gold indicator on each of the gold charts. Buy signals are generated when trendlines are broken.

Here are just a few examples:

A buy signal will be generated for HMY when the down trend line on the price relative indicator is broken to the upside:

One could make a case that a buy signal was generated for ASA on Friday:

DEZ is very strong as you can see:

A buy signal was generated on Friday for GLG: These are just a few examples.

The market had a good week, the Nasdaq closed up 50.83, the S&P closed up 31.67, and the DOW finished up 288.93. While last week looked good, January was a terrible month unless you owned oil or utility stocks. Debate continues whether or not the final market highs were seen in late December, however as I've stated in all my January newsletter, the long term trend remains up.

The market began a cyclical bull market in March 2003, and those up trends were never broken and are well intact. Therefore, until the long term up trend lines are broken on the major index charts, as traders we have to assume the trend is up and pullbacks will be bought.

News for next week:

Here is a table of the major economic news for next week:

Last Wednesday, the Fed raised short term rates once again by 0.25% to 2.5%. This move was expected and priced into the market.

However, what is bizarre to me is that even though short term rates are continually being raised, long term rates keep falling, and actually look like they are going to fall further. The chart of the 30 year bond below, shows that it has broken out of an ascending triangle, and it looks like more upside is in store. Remember, as bonds rally, rates fall. Therefore, this chart suggests that long term rates will continue to fall and bonds will continue to rally, at least in the near term.

Long term rates obviously have a big effect on the real estate market. Therefore, a breakout here would keep the housing/real estate market going strong for now.

The question I have is, why are bonds rallying? This chart seems to suggest that bond traders are not worried about inflation. However, could they by worried about deflation? Deflation is much worse than inflation, inflation can be fought via raising interest rates to cool the economy. However, deflation cannot be so easily controlled. Deflation is what this country experienced during the Great Depression, and it took a world war to end it. Also, deflation would actually be bearish for gold. However, I'm not ready to hang up my gold bull hat just yet. I think this anomaly between short and long term rates will only last for a short time.

As you can see, long term rates are breaking down....

Let's take a look at some market indicators:

The VIX is inversely correlated with the market: i.e. if the VIX falls, the market rallies, and vice versa.

Last week I presented this chart of the VIX:

Just like the Nasdaq, the long term up trend support line of the S&P 500 is well intact, and this cyclical bull market will remain as long as this up trend line holds true.

Notice how the S&P rallied perfectly off previous resistance at 1165, which is now strong support.

The NYSE rallied off support and may attempt new highs soon.