Caution: These Stocks Are Vulnerable to a Pullback Here

We knew it was going to happen.

After selling off hard in late July, we noted that the gold sector looked to be forming the same sort of bottoming pattern it developed last November.

[ad#Google Adsense 336×280-IA]The similarities continued into September.

Then, a few weeks ago, we got the gold-stock breakout we were looking for.

The Market Vectors Gold Miners Fund (GDX) is up around 20% in the past month.

And if the sector continues to behave as it did last November and December, then there are more gains ahead.

But it won’t be a straight shot higher…

Take a look at this chart of GDX…

Two weeks ago, the nine-day exponential moving average (EMA) crossed above the 50-day moving average (DMA). This “bullish cross” ignited the recent rally, just as a similar bullish cross ignited the rally back in January.

During that rally, GDX pushed higher, with the nine-day EMA providing support on the way up, until the fund was about 20% above its 50-DMA. The January rally peaked about one month after it started.

Today, GDX is already about 20% above its 50-DMA. The stock is overextended to the upside. And the gold sector is vulnerable to a pullback here.

But the rally isn’t over yet.

Notice how the moving average convergence divergence (MACD) momentum indicator crossed above the zero (neutral) line just last week. There’s still plenty of room for it to run higher before the indicator hits the sort of overbought extremes we saw in January.

There also isn’t any negative divergence on the MACD indicator. In short, as GDX has been making higher highs, so has the MACD line. This indicates that the trend is strong and any brief pullback is likely to be followed by another rally to a higher level.

The blue arrows on the chart show where I think the current GDX rally is, relative to the January rally. So there’s likely more upside ahead.

Traders should be prepared for a bit of weakness in GDX shares over the coming days – perhaps back down toward the nine-day EMA as support. So there’s nothing wrong with trimming some profits in anticipation of that pullback.

But be ready to jump back into the trade once GDX falls to the support level. The gold sector has at least one more solid push higher left in this rally phase.

Best regards and good trading,

Jeff Clark


Source: Growth Stock Wire