Monday, March 1, 2010
The gold sector is flopping back and forth like a trout in the bottom of a rowboat.
In my S&A Short Report, we managed to catch a couple quick trades in anticipation of a bullish percent index buy signal for the gold sector. And when the buy signal hit, I was salivating over the possibility of adding exposure in the sector. But as I wrote in Tuesday's Growth Stock Wire, something just wasn't right with the gold stocks. They had behaved poorly the previous Friday, and I was getting mixed signals.
Then, the gold sector dropped 3.5%.
This is actually good news for us. As I wrote on Tuesday, if the sector drops back to a lower low, it may develop "positive divergence" on the charts. That would set up a terrific longer-term buying opportunity.
It now appears that is happening...
The blue lines on the chart display a declining channel, and the red lines are the obvious support levels. Notice how the rally off the early February lows stopped right at the resistance of the declining channel.
Notice also there was no positive divergence on the MACD momentum indicator at the lows. This was a good clue that even though the sector was oversold and due for a bounce, the bounce would likely fail and GDX would come back and retest the lows.
The best situation we can hope for now is for GDX to drop below its previous closing low – at about $40 per share. Given where the MACD is right now, that would almost certainly create positive divergence (which means the decline is losing momentum). And that is when you could get aggressive with several gold stock positions.
This scenario may or may not play out. But the sector is following my script quite closely so far. Be patient and look for a shot at GDX below $40.
Best regards and good trading,
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