The Bullish Percent Index for the gold sector (BPGDM) still hasn’t generated a sell signal.

It’s still in the same position as it was when we looked at it earlier this month. But, if you’re looking for an excuse to add some exposure to the gold sector, Friday’s action is reason enough.

Let me explain…

Gold stock rallies tend to start with a typical pattern.

The sector gets oversold. The stocks stretch far below all of their various moving average lines. Then, one day, from this oversold condition the gold stocks drop even farther – thereby exhausting all of the selling pressure.

Then they reverse, recovering all of the day’s losses and perhaps even closing positive on the session.

That’s the sort of action that tends to kick off an intermediate-term gold stock rally. And that’s the sort of action we saw on Friday.

Look at this chart of the Gold Bugs Index (HUI)…

(Click here to expand image)

The gold sector was already oversold heading into Friday’s opening bell.

HUI had fallen from a high of 332 in April to 249 last Thursday. That’s a drop of about 27% in less than two months.

HUI opened lower on Friday, along with the decline in the broad stock market. The gold sector was down more than 2% during the first hour of trading.

But then… buyers stepped up.

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HUI slowly started to recover. It turned positive on the day, and by the end of the session HUI was up nearly 5%.

That’s the sort of action that typically signals a new gold stock rally phase. And I suspect this rally still has a long way to run.

As I mentioned earlier, the BPGDM still has not generated a buy signal.

Take a look…

(Click here to expand image)

The BPGDM needs to turn higher from its current oversold position in order to produce a buy signal.

Once it does, it’ll confirm that the gold sector has started a rally that should last between two and three months.

If Friday’s action was any indication, gold stocks should be much higher in the months ahead.

Best regards and good trading,

Jeff Clark

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