Last Sunday I wrote the following: "I think there is a good possibility that the gold market is at, or very near, a major bottom. I think a major investment opportunity is upon us that only comes along perhaps once a year or every few years."

Well my friends, I can say with fairly good confidence that gold finally hit its bottom last week!

The chart below contains the average net short positions held by commericial traders during major tops and bottoms in gold metal. As you can see, the commercial traders have been very adept at calling major tops and bottoms in gold metal. During major tops in gold, the average net short position by commercial traders was 155k positions. However, during major bottoms in gold, the average net short position was 42k positions. In other words, the commercial traders short positions were about 3 1/2 times higher during major tops in gold metal than during major bottoms. Obviously the commercial traders seem to be very adept at picking important tops and bottoms in the metal and it behooves us to listen to them.

As you can see from the chart below, the fantastic news is that the current net short position has dropped to 38k! In other words, if history repeats itself again, this sure looks like the bottom to me!!!

As if the above chart isn't compelling enough, the next chart is just icing on the cake. As you can see on the following chart, gold historically finds strong support at/near the 65 week moving average (or 295 daily). Also, the weekly stochastics do a nice job at predicting major bottoms.

It also seems as though the Elliot Wave chart I presented has panned out very well. The 5th wave ended near $410 last week and a new wave has likely begun - either an ABC or another 5 wave pattern.

Anyway, gold will not go straight up, there is resistance at the gold band region noted on the chart below.

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, the Dollar looks like it is in the process of topping out. The Dollar will probably once again top out at resistance near the 200 moving average. Also, the daily stochastics are in the process of becoming over bought.

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.

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 that gold stocks are finally starting to outperform relative to the metal. This was predicted via the positive divergence which had been developing in the MACD.

However, the HUI / Gold ratio chat also broke above the 50 day moving average. The 50 day MA has been a significant level in the past.

Here's the 'big picture' view of the above chart: This chart shows you just how important the 50 day moving average has been during this entire gold bull market. This year, I suspect the red dotted line will probably be the significant down trend line which will launch the next powerful up leg in the HUI. When that line is broken, we could see the HUI begin a rally that takes it up to the high $300s or the low $400s!

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. As you can see, the HUI found support at the up trend line, we couldn't have planned it any better!

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 very bullish, notice how the XAU rallied off the uptrend line.

The daily chart of the XAU broke out of a bullish falling wedge last week and subsequently a buy signal was produced via the price relative to gold indicator.

However, there is strong resistance at about $96, if the XAU can break this resistance, then the XAU should have a clear path to about $100!

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.

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.

As many of you know, gold stocks had an awesome week, in fact it was hard to pick a bad gold stock last week. Gold stocks will pullback soon, therefore aggressive traders can look to start locking in profits. My plan is to lock in some profits and then buy back aggressively during the inevitable pullback. However, for investors or those of you who are busy with your jobs, you can simply hold here.

Gold stocks are in a bull market and this year may be an awesome year for gold stocks. Take the following chart of BGO for example. BGO came out of a large 5 1/2 year base in 2003 and is forming a large symmetrical triangle. BGO could once again run up to test historical highs once it breaks the triangle to the upside.

I'm not saying that BGO is the best gold stock, I'm just using it as an example of what long term investors can expect for gold stocks!

General Market Analysis:

The market had a mixed week, the Nasdaq closed down 10.00, the S&P closed up 2.27, and the DOW finished up 79.88. However, over the past couple weeks, I've been showing you the following chart; the Semiconductors / Nasdaq ratio. Last week the ratio broke the major down trend line which was over a year long, thus signaling that semiconductors would begin to outperform relative to the Nasdaq.

Semiconductors had a strong week. For example, the SOX was up 17.36 while the Nasdaq was down 10. To give you some perspective, consider that the Nasdaq trades at about 4.8 times the price of the SOX, 2076 vs 435 respectively. In other words, a 17.36 point rally for the SOX would be equivalent to the Nasdaq rallying about 83 points!

Anyway, the strength of the semiconductors is very positive for the Nasdaq and the market in general. Think of it akin to Dow Theory where the DOW and the Transports are linked. The Nasdaq and the semiconductors are also strongly correlated with one another and they can only diverge for so long before they move together. If the semiconductors stay strong, then the Nasdaq can't be far behind.

However, I must stress that the market is not out of the woods just yet: The Nasdaq is currently the weakest major index and the DOW Jones is the strongest. This is not the kind of action you want to see. We have been seeing a rotation out of the Nasdaq into the DOW which is not bullish - we need this trend to reverse itself.

For example, the following chart is a great example of what I'm talking about. We need to see the current down trend line breakout to the upside. If this occurs, then the Nasdaq will once again begin to outperform relative to the S&P and the market should hit new highs.

Last week I stated in my newsletter to look at semiconductors for trading candidates, and I couldn't have been more on the money, except for gold stocks possibly. My point is, trading can be much easier by focusing on key sectors that are, or are about to, show strength, rather than picking any old stock with a nice pattern. By focusing on key sectors that are breaking out, your chances of picking winners greatly improve. For example, last week you could have picked nearly any semiconductors stock or gold stock, regardless of their pattern, and you would have probably done well.

Now lets take a look at the Semiconductor index itself: As you can see, there was a bullish inverse head & shoulders pattern prior to last weeks rally. Also, the next resistance and target for the semiconductor index is 1200. I think the SOX will probably test this resistance next week and possibly break it.

Either way, continue to focus on semiconductor stocks for day trading and especially swing trading candidates.

Let's take a look at a mechanical trading system for the QQQQs using a couple of indicators.

For example, the following indicators can be used to generate buy/sell signals for the QQQQ: The NASI and the NDX/S&P ratio. These systems are not exciting, however they can be ideal for those who work and/or travel extensively. These systems can generate gains of 30% a year or more without using margin! The gains would be double if margin is used or a Rydex fund that returns double the NDX. Again, that may not sound exciting, however consider that your average broker or financial advisor would tell you if you can get 7-10% a year, your doing great. Well, 30% or 60% would be unheard of for these guys. Also, if you have a lot of money or a large 401k, then 30% returns can be a lot of money.

There are two indicators that seem to work well to generate mechanical buy/sell signals for the QQQ; they are the NASI and the NDX / S&P 500 ratio.

NASI:

I have shown you the NASI many time before, buy and sell signals are generated via parabolic sar and a MACD crossover.

The S&P 500 could easily test new highs next week.

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.

The NYSE is currently testing new highs, if the market is strong next week, then the NYSE will likely make new highs next week.

In the fall of 2004, I stated that the Japan Nikkei index looked extremely bullish as an inverse head and shoulder was forming. Nothing has changed and this bullish pattern continues to form. Major resistance is about 12500, with the 1st target at about 14,500, and the second target at about 17,000.

Japan has been in a sideways secular bear market since the early 90's. It looks like it's time for the secular bear market to end and a new bull market to begin in Japan.

So how does one take advantage of this potentially bullish situation with the Nikkei?  One could buy one of the Japanese ETFs, symbols EWJ or JOF. However, the Profunds Ultra Japan offers more bang for the buck. For example, if the Nikkei goes to the first target of about 14,500, this would correspond to target of about $75 for UJPIX, a very nice return!

Realize that this will likely take a year or more to come to fruition.