The recent gold stock buy signal is off to a good start.

The Bullish Percent Index for the gold sector (BPGDM) generated a buy signal two weeks ago, when it turned higher from extremely oversold levels.

That’s happened only four other times in the past four years. Following each of those times, the gold sector rallied at least 30% over the next three months.

The Gold Bugs Index (HUI) is up a little more than 8% over the past two weeks. So, there’s still plenty of room for the sector to run. It should be much higher by January than where it is today.

But, it won’t be a straight shot higher…

The gold sector is notoriously volatile.

But, if this current rally phase plays out similarly to what happened following the buy signal in March, then traders should be looking to add exposure to gold stocks on any pullbacks over the next few weeks.

Take a look at this chart of HUI…

(Click here to expand image)

Following the BPGDM buy signal in early March, the gold sector blasted higher for about two weeks. Then it hit resistance. And, the resulting pullback erased just about all of the gains of the rally.

Lots of gold bugs threw in the towel on their trades at that time.

They were dismayed… Gold stocks had disappointed investors all year, and we finally got what looked like the start of a major rally – only to see those gains get wiped out.

I argued back then that the weakness in the gold sector was a time to buy – not sell – the gold stocks. The sector was just at the beginning of a strong rally phase. And, I’ll make that same argument if we get a pullback over the next several days.

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HUI closed Friday right at the resistance level of its September high. It broke through that level during the day, trading as high as $267. But, some selling pressure in the gold sector late in the day pushed the index back below resistance.

That selling pressure may persist this week as traders take profits heading into next week’s Federal Open Market Committee (FOMC) meeting.

HUI might even give back a large amount of the gains it has made so far on the BPGDM buy signal (I’ve drawn a dashed red line on the chart to show how I think this move might play out).

But, just like the pullback in March led to a wonderful buying opportunity in the sector, a pullback this week could do the same thing. By the time the BPGDM buy signal runs its course, I expect HUI could be back up near the $300 level – or even higher.

Traders should prepare to buy gold stocks on weakness this week and next.

Best regards and good trading,

Jeff Clark

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