The Bullish Percent Index for the gold sector (BPGDM) just triggered one of the strongest gold stock buy signals in four years.
The BPGDM generates only one or two trading signals each year. The last buy signal we got back in March kicked off a three-month-long 30% rally in the gold sector.
This current buy signal is set up to be even more powerful.
Let me explain…
The BPGDM measures the percentage of gold stocks that are trading in a bullish technical formation. It’s basically 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.
Take a look at this long-term chart of BPGDM…
The blue arrows on the chart point to the previous buy signals of the past four years.
Here’s how the Gold Bugs Index (HUI) performed after all of those signals…
HUI gained 25% in four months following the buy signal in October 2018. It rallied 50% in three months after the 2019 signal. The gold sector surged 90% in three months following the signal in 2020 – which was coming off of massively oversold conditions. And, HUI gained 30% in three months after the BPGDM buy signal earlier this year.
Now, we just got another buy signal, and it triggered with the BPGDM at an even lower level than the signal back in March.
The gold sector is even more oversold than it was back then. So, the coming rally could be even more powerful.
Of course, the gold sector has been hard to trade over the past few months. We’ve seen lots of potentially bullish setups fail. That has led to lots of frustration among gold stock traders. And, it has created an extremely pessimistic atmosphere.
But it is from this sort of extreme pessimism that the best rallies develop.
I expect the gold sector will be much higher three months from now than where it is today. Traders should look to buy gold stocks on any weakness in the days ahead.
Best regards and good trading,
Editor, Market Minute