Gold stocks look vulnerable to a sell-off.

That’s not going to be a popular comment.

No doubt, some readers may scream “BLASPHOMY” and vow to never read my comments again.

But stay with me here. I remain quite bullish on the longer-term prospects for gold and gold stocks. It’s the short-term setup that is causing me problems.

For the past few months, the gold sector has been on fire. The Van Eck Vectors Gold Miners Fund (GDX) is up nearly 50% since we pounded the table to buy gold stocks last October.

But the conditions today are different than the conditions back then.

In October, the gold stocks were violently oversold and almost no one wanted anything to do with them.

Today, the gold sector is wickedly overbought. And almost everyone – including most talking heads on financial television – is bullish on the sector.

More importantly, my favorite gold sector trading indicator is overbought and approaching a “sell” signal…

Take a look at this chart of the Bullish Percent Index for the gold sector (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.

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 red arrow on the left-hand side of the chart points to the only sell signal triggered last year. The red arrow on the right-hand side of the chart points to where we are now.

BPGDM is approaching 80. It’s nearing the sort of overbought conditions that lead to a sell signal.

Yes, there is room for it to work higher. So, maybe the gold sector can continue its rally for a little while longer.

But the air is getting thin…

After a 50% rally in six months, the gold sector is closer to a top than it is to a bottom. There is more risk than there is reward.

After all, GDX fell 45% in five months following last year’s BPGDM sell signal.

Best regards and good trading,

Jeff Clark

Source: Jeff Clark Trader