Maybe the fourth time will be the charm for BPGDM.
The Gold Miners Bullish Percent Index (BPGDM) just triggered its fourth sell signal of 2024. The previous three signals were duds – yielding only small declines in the Gold Bugs Index (HUI) before gold stocks took off higher again.
That’s unusual. The BPGDM has triggered reliable trading signals for the 15 or so years I’ve been following it. So, as tempting as it may be to toss this indicator out of my toolbox, I’m not willing to do that just yet.
Look at this chart…
In most cases, a sector is overbought – and subject to a correction – when its Bullish Percent Index (BPI) rallies above 80 (meaning 80% of the stocks are trading in bullish technical patterns).
A sector is oversold when the BPI dips below 30. The BPI generates a buy signal when it turns higher from oversold conditions. We get sell signals when the BPI turns lower from overbought levels.
The red arrows on the chart show the BPGDM sell signals so far this year.
Here’s how the gold sector performed following the three previous sell signals…
There’s not much to get excited about here. Gold stocks dipped a bit following the sell signals. But they quickly recovered and went on to rally to higher levels.
Over the past four years, though, BPGDM sell signals led to declines of anywhere from 12% to 30%. So, I’m thinking maybe this time, after three small reactions, the sell-off in the gold sector will be larger.
After all, the dollar looks like it’s ready to bounce. The Commitments of Traders report shows the “smart money” for the gold sector is short the largest amount of gold futures contracts in over a year. And retail investor enthusiasm (a contrarian indicator) for gold stocks is quite bullish.
All of this suggests the gold sector could be in for a rough fourth quarter.
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For the record, I’m naturally averse to shorting gold and gold stocks. I’m much more comfortable leaning bullish on the sector.
But when conditions line up as they are now, I’ll make short-term speculative short trades in the gold sector. Any strength in gold stocks in the coming days is a chance to add short exposure.
Best regards and good trading,
Jeff Clark
Editor, Market Minute