Tuesday, November 23, 2010
If history is destined to repeat, gold stocks may be headed for a rough spell.
The gold sector bullish percent index (BPGDM) flashed a sell signal last week. So the odds now favor an intermediate decline for the sector.
A bullish percent index (BPI) measures the percentage of stocks trading with bullish "point and figure" charts. There's no need to get too technical here. Suffice it to say, a sector is overbought when the BPI is above 80. And a sector is oversold when the BPI drops below 30.
For the gold sector, BPGDM generates buy signals when it drops below 30 and then turns higher. Sell signals occur when BPGDM pops above 80 and then turns lower.
We got the first sell signal of the year a few weeks ago. But it never really gained any traction. BPGDM rolled over, but turned higher just a few days later.
With the latest sell signal, however, the chart looks eerily similar to how it looked last year around this time – just before gold stocks dropped 25% in two months.
Take a look...
Of course, there's no guarantee gold stocks will behave the same way this year as they did last year. But the setup is similar, and gold fever is running high. So maybe a little caution is warranted.
Aggressive traders can take a shot at a short trade or two in the gold mining sector. The stocks are plenty volatile. And a well-timed short sale could yield big profits in just a couple weeks.
More conservative traders should look to use any correction as a buying opportunity. Gold stocks are in a long-term bull market. Since the Federal Reserve Board is determined to devalue the dollar through perennial quantitative easing programs, gold and gold stocks will move higher over time. In fact, any short-term weakness over the next month or two may be your last chance to buy into the gold sector at a reasonable price.
Keep an eye on the gold sector bullish percent index over the next couple months. Once it drops below 30 and turns higher, you'll want to be buying gold stocks with both hands.
But for now, the sector is likely due for a pullback.
Best regards and good trading,
Jeff forecast gold's first sell signal of the year back in October. Read his full prediction here: Investors Will Hate This Trade. Traders Will Love It.
Last December, the BPGDM indicated a sell… and a 23% drop later, it was hitting oversold levels. With history as a guide, see what could be in store for gold in the next couple months here: The Best Time in a Year to Buy Gold Stocks.
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