Get ready to buy the gold stocks.
The overbought conditions that turned us cautious, even bearish, on the gold sector one month ago have been worked off. We’re now approaching a buying opportunity.
Look at this updated chart of the bullish percent index for the gold sector (BPGDM)…
The BPGDM measures the percentage of gold stocks that are trading in a bullish technical formation. It’s a gauge of overbought and oversold conditions.
Since it’s measured as a percentage, a bullish percent index can only reach as high as 100% or fall as low as zero.
Typically, a sector is extremely overbought when its bullish percent index rallies above 80%. It’s extremely oversold when it drops below 30%.
Trading signals are generated when the index reaches extreme levels and then reverses. But, that’s not a HARD rule.
Technical analysis is much more of an art than a science. So, we have to allow for some “wiggle room” on the indicators.
The BPGDM never reached 80 before it reversed lower. It didn’t technically generate a sell signal. But, traders who allowed for some wiggle room would have avoided the 13% decline in the gold sector over the past month.
Now we need to allow for some wiggle room on the buy side as well.
The BPGDM closed at 54 on Wednesday. That’s still well above the 30 level that indicates extremely oversold conditions. So, there’s room for the gold sector to work even lower.
But, we probably don’t need to see the index dip below 30 before buying the gold stocks again.
Since the BPGDM didn’t technically generate a sell signal last month it may not, technically, generate a buy signal before the gold sector starts to move higher again.
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Folks who were looking to buy gold stocks last month certainly have a much better opportunity to do so today.
We still might see some additional weakness in the sector in the short-term. But, the longer-term outlook remains quite bullish.
Traders should consider using any weakness in the gold stocks over the next few days as a chance to add exposure to the sector.
Best regards and good trading,
Are you bullish on gold stocks?
Let us know your thoughts – and any questions you have – at [email protected].