By Jeff Clark – the editor of the Jeff Clark Trader
If you’re thinking about chasing the gold sector higher right here, you might be better off waiting a few weeks.
The bullish percent index for the gold sector (BPGDM) just triggered a “sell” signal. Gold stocks are likely to be lower a few weeks from now than where they are today.
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Take a look at this chart of BPGDM…
A Bullish Percent Index (BPI) illustrates the percentage of stocks in a sector trading with bullish chart patterns. It’s a measure of overbought and oversold conditions.
In most cases, a sector is overbought – and subject to a correction – when the 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 sell signal when it turns lower from overbought conditions. It generates a buy signal when it turns higher from oversold levels.
The BPGDM had been trading at 92 for the past few weeks. That means 92% of the stocks in the gold sector are in bullish technical patterns. It’s mathematically impossible for the BPGDM to rally much higher from here. After all, since it’s a percentage, it can only run to 100.
The index turned lower last week. And, that action has generated a sell signal.
This is just the third BPGDM sell signal in the past year. But, if it plays out like either of the previous two signals, gold stocks should be lower in the weeks ahead.
The BPGDM sell signal last September coincided with a 15% decline in GDX in two weeks. The sell signal in January took a lot longer to play out, but it led to the massive decline in March.
I suspect the next BPGDM sell signal will look more like the signal from last summer. I’m expecting a sharp, quick decline. So, traders who are looking to add exposure to gold stocks ought to consider waiting a bit to do so.
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