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Published: February 16, 2010
Right now is the best time in a year to buy
into the precious metal sector.
My long-time readers know I rarely buy gold stocks. Because of
the long-term bull market in gold, these stocks get very popular
with the public in a hurry. Gold stock investors are a highly
emotional bunch, and they'll change direction more often than a
pair of squirrels on the highway. Follow the crowd, and you'll
get run over.
But follow my advice in today's essay, and you'll always make
money trading gold stocks.
The trick is to avoid buying gold stocks when they're running
higher and when everyone else is rushing into the sector. You
want to buy into the sector when the stocks are oversold and
everyone else is jumping out of them.
This strategy has produced a pretty good track record. As I
mentioned, I rarely buy gold stocks. But the last six times
readers of Advanced Income (my income-focused trading
advisory) have bought them, they've made money... with safe,
fast gains ranging from +15% to +110%.
The strategy? Just follow the single best gold stock timing
indicator in the world: The gold stock sector's bullish percent
index (BPI).
A BPI is a momentum-based indicator that measures overbought
and oversold conditions. It shows us when gold stocks may be
ready to snap back in direction, both up and down.
Most sectors are overbought when the bullish percent index rises
above 80. This is a warning sign the upside move is stretched
and may need a pause. Stocks are oversold when the BPI drops
below 30. This usually occurs near the end of a downside move.
Oversold and overbought conditions are not, by themselves,
reasons to buy or sell stocks. Oversold conditions can get more
oversold just as overbought conditions can get even more
overbought. Trading signals occur when the BPI reaches an
extreme level, then starts to move back in the other
direction... when a sector's extreme move has lost its momentum.
These extreme "buy gold stock" readings don't flash often. But
one is flashing right now. Here's the current
overbought/oversold BPI reading for gold stocks:
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As you can see, gold stocks haven't been this oversold since
late 2008. This was an extraordinary time to buy gold stocks.
Just after the extreme reading back then, the big gold stock ETF
doubled in price in four months. Some of my favorite silver
stocks tripled in price in just months. My readers were along
for the ride.
If you do nothing but follow these overbought/oversold gold
stock readings, you'll do far better in gold stocks than most
folks ever will. You're either a contrarian with these stocks...
or you're giving your money to those of us who are.
-- Jeff Clark
Editor
Advanced Income
Note: This article originally appeared on
Daily Wealth. |
