Gold stocks are back in “rally mode.”
The summer rally in the gold sector peaked in early September when the VanEck Vectors Gold Miners Fund (GDX) traded as high as $25.50 per share.
By the middle of last week, though, GDX was trading 10% lower. That’s a pretty dramatic decline for just a couple of weeks, in any sector.
But at $23 per share, GDX was approaching support. And the technical conditions were setting up in such a way that I wrote, “traders may get a shot at buying back into the gold sector later this week or early next week.”
We now have that shot.
You see, two very important gold stock momentum indicators have turned higher. That should support a rally in the gold sector over the next few weeks.
First, take a look at this updated chart of the GDX/Gold ratio…
This chart displays the relationship between gold stocks and gold. When the chart is trending higher, gold stocks are outperforming gold. When the chart is trending lower, gold stocks are underperforming the metal.
If you own gold and gold stocks, you want this chart to be moving higher. That’s typically when you get the strongest rallies in the gold sector. Just look at the uptrend on this chart starting in mid-August. GDX rallied 12% in three weeks during that period.
This chart bounced off of support and is now moving higher. That means gold stocks are outperforming the metal. This is when traders should own the sector.
We’ve also had a positive development in the Gold Miners Bullish Percent Index (BPGDM).
BPGDM illustrates the percentage of stocks in the gold sector trading with bullish chart patterns. It's a measure of overbought and oversold conditions.
In most cases, the sector is overbought – and subject to a correction – when BPGDM rallies above 80 (meaning 80% of the stocks in the sector are trading in bullish technical patterns). The sector is oversold when BPGDM dips below 30. And the Bullish Percent Index, regardless of the sector it tracks, generates a buy signal when it turns higher from oversold conditions.
Here's how BPGDM looks now…
We got the first BPGDM buy signal of the year in mid-July. GDX was trading near $21.50 at that time. It rallied all the way up to $25.50 two months later. BPGDM rallied right along with the gold stocks.
Starting in early September, even though it was only at 40 – which is quite far away from overbought levels – BPGDM stalled out. It even started trending lower by the end of the month.
It’s hard to argue for a rally in gold stocks while BPGDM is trending lower. But with Wednesday’s reversal in BPGDM, the gold sector looks ready to rally again.
Traders should now be looking to add exposure to the gold sector in anticipation of higher prices over the next few weeks.
Best regards and good trading,
Jeff Clark
P.S. How do you plan on playing these bullish signs for the gold market? Do you like gold for the long term, as well?
Send me your thoughts – along with any questions and suggestions – to my email right here.
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