The Bullish Percent Index for the gold sector (BPGDM) just generated its third buy signal in three months.
Of course, that means the previous two buy signals failed to launch the sort of strong rally that usually follows such signals.
And that may cause many traders to question whether BPGDM signals have any value anymore.
After all, if the gold sector didn’t rally after the BPGDM buy signal in July, and gold stocks didn’t rally after the buy signal in August, then why should we expect the gold sector to rally now?
The easy answer is… perhaps the third time is the charm.
The more complex answer is that no trading signal is 100% accurate.
Sometimes the market has to shake out traders’ confidence in any one indicator before signals from that indicator start to work again. And sometimes it takes a cluster of signals before we get the expected move.
Regular readers might remember the Volatility Index (VIX) sell signal we got in late July.
Back then, I argued that VIX sell signals are a bad omen for stock prices. But, I also wrote that sometimes it takes a little while for VIX sell signals to kick into gear.
Stocks continued to rally for three more weeks. The S&P 500 rallied from 3900 to 4300. And by the time we got the third VIX sell signal in a month, many traders didn’t think the signal had much merit.
After all, if the first two signals didn’t work, then why should we expect the third to be any different?
Since then, the market has fallen hard. The S&P 500 dropped 700 points in about six weeks as the cluster of VIX sell signals finally played out.
I suspect the recent cluster of BPGDM buy signals will soon prove valuable as well.
Look at this chart of the 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.
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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. The blue arrows on the chart point to previous buy signals of the past two years.
All three of the buy signals in 2021 proved profitable. The Gold Bugs Index (HUI) gained 25% in three months following the March 2021 buy signal.
The index rallied 15% in six weeks after the October buy signal. And HUI exploded 38% higher in three months following the December buy signal.
So far, though, the BPGDM buy signals of 2022 haven’t performed so well.
HUI is trading today at about the same level it was at when the BPGDM generated buy signals in July and August. Many traders are questioning whether the signal works anymore.
But perhaps they should be asking… Is the third time the charm?
Best regards and good trading,
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Jeff Clark
Reader Mailbag
Do you think the BPGDM is still a reliable indicator for gold?
Let us know your thoughts – and any questions you have – at [email protected].