The current selloff in gold and gold stocks will prove to be a buying opportunity.
But, the best part of that opportunity is still at least a couple of weeks away. That’s when the sector should have worked off its overbought condition. And, we’ll have the setup for a gold stock rally going into the end of the year.
I turned cautious on the gold stocks back in May when the Gold Miners Bullish Percent Index (BPGDM) turned lower from an overbought condition, thereby triggering a sell signal.
I stayed cautious in June following a second BPGDM sell signal. I turned downright bearish in late July when the BPGDM was on the verge of a third sell signal.
And, in early October, I personally sold out of my remaining gold positions and advised subscribers to take a small short position in the gold sector.
I’m a Gold Bug…
Admittedly, being short gold is a difficult stance for me. I am a gold bug. I am convinced the metal and the gold stocks will be much higher in the months and years to come.
But, having traded the sector for much of the past 40 years, I have learned that when so many indicators are signaling a correction in gold stocks, we have to be careful.
Yes, by selling out of the sector completely we risk leaving money on the table if the gold stocks continue higher. Eventually, though, the sell signals play out. The gold stocks drop. And, we get a chance to buy back in at lower prices.
I expect we’ll get that chance a few weeks from now.
Look at this chart of the Gold Bugs Index (HUI)…
HUI peaked in mid-October and began a sharp decline. It closed Monday on the support line connecting the September low and the May high. This is a natural area at which to look for a bounce.
Notice, though, that all of the various moving average lines have rolled over and are now in a bearish configuration – with the 9-day EMA below the 20-day EMA, and the 20-day EMA below the 50-day MA.
Those moving averages are now going to be resistance on any bounce attempts.
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The Three Steps of Gold Corrections
And, most corrections in the gold sector tend to unfold in three distinct moves – the first move is lower, followed by a brief bounce, and then we get another move lower that finishes the decline and sets up a buying opportunity.
It looks to me like HUI either has completed – or will soon complete – the first move lower.
Now we’ll get a bounce back up towards the declining moving average lines. Following that bounce, HUI should decline again, break the first support line and head towards the second support line near $260.
That will represent a much lower-risk opportunity to buy into the gold sector than at any other time during the last five months.
Traders who paid attention to the various gold sector sell signals and avoided the temptation to follow the crowd into the gold stocks should soon have their patience rewarded.
It’s not yet time to buy. But, that time is getting closer.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
MAILBAG
Have you followed gold’s buy and sell signals? Did you follow the crowd into gold? Where do you think the gold market is headed?
Let us know at feedback@jeffclarktrader.com.