Gold fever is running high.
Yesterday, the shiny yellow metal capped a two-month, 11% rally by closing at an all-time high of $1,350 per ounce. The Market Vectors Gold Miners Index (GDX) is up 25% over the past 60 days. And the Junior Gold Miners Index (GDXJ) is up a whopping 40%.
It has been a nonstop party, brought to you courtesy of the U.S. government’s currency debasement scheme.[ad#Google Adsense]Since there’s no end in sight to low interest rates, high deficit spending, and multiple quantitative easing programs, we’re likely to see gold run much, much higher over the coming years.
Over the short term, however, it may be wise to be a little cautious here. In fact, it may pay to speculate a little on the downside. We’re about to get the first sell signal of the year for gold stocks.
The bullish percent index for the precious metal sector (BPGDM) reached overbought levels last week and is now on the verge of turning lower. It’s difficult to short the sector as a long-term investment, because logic argues for higher gold and silver prices over time. But gold stocks are notorious for experiencing vicious selloffs. And it can make for some extraordinarily profitable trades – as long as you get the timing right.
BPGDM is a terrific timing tool.
A bullish percent index measures the percentage of stocks in a sector that are trading in bullish technical patterns. It’s a percentage, so it can range between zero and 100. Readings below 30 indicate oversold conditions. Readings above 80 indicate a sector is overbought.
“Buy” signals occur when a bullish percent index gets oversold and then turns higher. And “sell” signals happen when an index gets overbought and then turns lower.
BPGDM hasn’t given us much to act on this year. The buy signal early this year yielded some solid profits. Since then, however, we have seen almost eight months of inactivity from this trading indicator.
Get ready for some action.
As you can tell from the following chart, BPGDM is about to trigger a sell signal…
The final red circle on the chart is where we are at today. BPGDM is at 80. So it’s overbought. When it turns down, we’ll have our sell signal.[ad#Google Adsense]All of the other red circles indicate the sell signals that were triggered last year. Following each of those sell signals, the gold sector declined at least 10% within just a few weeks. Given the remarkable run-up over the past couple months, a 10% correction could be painful for anyone jumping into the sector right now.
It could also be quite profitable for anyone looking to speculate a little on the downside.
Betting against gold feels a little like betting against your favorite football team. Of course, my favorite teams are the Oakland Raiders and the San Francisco 49ers. Betting against them so far this year would have paid well.
If we get a sell signal on the BPGDM, a short-term bet against the gold stocks will probably pay well, too.
Best regards and good trading,
— Jeff Clark
Editor’s note: When the BPGDM triggered a buy signal back in February, Jeff gave his readers three trades to take advantage of it. They netted returns of 117%, 73%, and 69%. The coming sell signal could be equally as profitable.[ad#jack p.s.]