“This is B.S. Gold stocks aren’t going anywhere.”
That’s the opening line of an email I received from a trader friend of mine around 10:30 ET yesterday morning.
“The dollar is breaking down. We’re almost at war with North Korea. The entire oil sector is flooding. We’ve hit the debt ceiling limit. There’s a nut-job in the White House. How the **** does gold not move higher?”
I’m out. I’m taking my small profits on my gold stocks. If they can’t move higher now then they’re going to move lower when things calm down.”
Less than one hour later, I got another email from the same guy…
“SON OF A *****. I’m back in. I can’t believe how fast gold just spiked. This is the rally I’ve been waiting for. I bought everything back plus some extra. This is it!”
Like many gold bugs, my friend is an emotional basket case.
He’s a “gloom and doomer.” He owns gold and gold stocks because he believes that we are all doomed in the long run.
The $21 trillion official debt of the United States – or $200 trillion unofficial number – will never be repaid. It will eventually collapse the U.S. dollar. And all other currencies around the globe will collapse right along with it.
My friend will be right… eventually. So, I like the idea of holding a core position in gold and gold stocks for the super-long-term. But “eventually” can take a long time to get to.
So, if you want to trade gold and gold stocks for short-term profits, then you need to recognize extreme emotional sentiment in the gold sector… and be willing to tune out that emotion.
In other words, you need to buy at logical support levels when gold sentiment is overly bearish… And you need to sell at logical resistance levels when sentiment is overly bullish.
I was excited about buying gold stocks in mid-July when the VanEck Vectors Gold Miners ETF (GDX) was testing support near $21 and the GDX/Gold ratio chart was on the verge of breaking out to the upside.
Most of my gold trader friends were bearish. They were frustrated by the action in gold stocks and it looked to them like the sector was ready to break down.
But GDX moved higher off of support.
Then, on July 25, I noted that the Commitment of Traders report was bullish for gold and silver. My gold trader friends – who normally love anything positive I write about gold – responded by telling me GDX was hitting the resistance of its 50-day moving average line (it was) and was probably going to turn lower.
It didn’t. GDX popped over its 50-day MA, and the 9-day exponential moving average also crossed above the 50-day MA, thereby creating a “bullish cross.”
So, on July 31 I wrote “August Looks Good for Gold Stocks.” And I suggested GDX would at least run as high as the first resistance line – at about $24 per share.
GDX hit that first target yesterday.
Now – more than almost anything – I would love to tell you that GDX is moving higher from here. I’d love to tell you this is the start of the next great move higher for the gold sector.
But I can’t.
My friend’s emotional emails tell me this is the time to start trimming profits on my gold positions. Take a look at this chart…
If you bought GDX near the $21 support level back in July, then you have a terrific profit here as it has pressed above resistance at $24. The next resistance is near $24.50.
GDX is now quite extended above its 9-day EMA. We’ll quite likely see a move back down to that level to test it as support and to relieve the current overbought condition.
Yes, GDX could stretch higher towards the next resistance level near $24.50. But that’s probably the maximum move for this rally phase.
The best way to profit off of the gold sector is to buy GDX at support and then sell it at resistance. If you bought GDX anywhere near the $21 level in July, then selling it here near resistance at $24.20 is a really nice short-term return.
So, here’s my point…
Most gold stock traders are highly emotional. They’ll jump ship at the first signs of a breakdown (early July). And they’ll leverage their trades on the first sign of a breakout (late July).
By my experience, it’s best to take the other side of those emotional trades.
I was a big buyer of gold stocks in early July. Now, after more than a 12% higher move in the sector in just one month – and especially since my trader friend has gone wildly bullish – I’m anxious to take profits.
I suspect the upside from here is limited.
Best regards and good trading,
P.S. How are you responding to the recent action in the gold market? Let me know – along with any other questions or concerns – right here.
Today, a reader from Friday’s mailbag issue, “Preparing for a Market Crash” writes in with what he’s learned…
Thank you for explaining how moving averages need to be consistent with the timeframe of the chart. It makes all kind of sense now given that I have been having trouble interpreting and comparing charts in different time frames.
Keep educating us, no matter how elementary a subject may seem.
I have been a longtime subscriber and you have taught me so much and done well on many trades.