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Three Charts Every Gold Stock Trader Should SeeBy
Friday, August 10, 2012
Everything is falling in place for a big gold stock rally...
So far this year, it's been tough to make money owning gold stocks. Every rally has been weak. Every subsequent decline has been steep. The big gold stock fund, GDX, for example is down 25% over the last 12 months.
This decline has made gold stocks very cheap... and ready to rally. Let me show you what I mean...
We'll start with one of my favorite sector indicators.
The precious metals sector bullish percent index (BPGDM) generates a buy signal when it drops into oversold territory (below 30) and turns higher. Late last month, it generated a buy signal, and it has continued higher since then. Take a look...
 The blue circles indicate the buy signals we've seen over the past year. The signals that triggered in 2011 generated large gains for the gold sector (and for my S&A Short Report readers).
We haven't had the same experience in 2012. The buy signals this April and May never reached their potential. We settled for much smaller profits than I had originally anticipated. But this time, I suspect the buy signal will be stronger and carry the sector much higher.
And we have two more indicators that argue for higher gold stock prices. First, there's the following chart, which compares the action in gold stocks to the action in gold...
For most of the past year, gold stocks have lagged the action in gold. So this ratio chart has been falling. For a few weeks in May, though, gold stocks outperformed the metal. They've been outperforming for the past two weeks as well.
 The best time to own gold stocks for the intermediate term (several months) is when the stocks are outperforming the metal. In other words, you want to own gold stocks when this chart is rising. That's the case today.
Finally, we also have this bearish development in the U.S. dollar index...
The U.S. dollar just broke down from a bearish rising-wedge pattern (the blue lines). At a minimum, the greenback should fall toward the first red support line at about 81. But there's a pretty good chance the dollar will give up the gains it's made since March and drop all the way back down to just below 79.
 A falling dollar is typically bullish for gold. And a rising gold price is typically a good thing for gold mining stocks.
Nothing is guaranteed. But these charts are bullish for gold stocks... and we now have a low-risk, high-reward trading opportunity in front of us.
Best regards and good trading,
Jeff Clark
Further Reading:
"If you're bullish on gold, this is an excellent, low-risk area to buy it," Jeff told Growth Stock Wire readers last week. See how one chart pattern tipped Jeff off to a setup in gold offering 10 times more upside reward than downside risk here.
Market NotesHOMEBUILDER STOCKS SOAR IN A BIG "BAD TO LESS BAD" RALLY Our "bad to less bad" homebuilder trade is turning out to be a big winner...
For much of the past year, we've encouraged readers to take a position in the homebuilding sector. We knew the advice sounded crazy. After all, when we first issued our advice, the housing market was bad. Homebuilder shares had been crushed... and sentiment toward the sector was terrible.
But regular readers know that when things are "bad," assets get so depressed and cheap, it only takes "less bad" conditions to produce huge rallies. That's been the case with homebuilders recently. The housing market has bottomed... and demand is picking up a little.
You can see this idea at work in the large homebuilder investment fund, ITB. As you can see from the 18-month chart below, homebuilders suffered during last summer's correction. But as things have gone from "bad to less bad" this year, ITB has soared. It has led the market to gain 45% this year... and more gains are likely to come.
– Brett Eversole
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