Gold Stocks: Now’s The Time To Buy…

| December 15, 2011 | 0 Comments

Well here we are… the holiday season is in full swing.

And that means the fat man in the red suit will be sliding down chimneys in the very near future.  Of course, kids are ripe with anticipation in hopes Santa will bring them just what they’re wishing for.

But they’re not the only ones wishing for a Christmas miracle…

The way stocks have performed over the past few weeks, I’m sure a fair share of investors are feeling a bit like the Grinch.  And they’re probably crossing their fingers for Ole St. Nick to bring a stock market rally to brighten their portfolio.

If you’re in that situation, listen up…

Instead of crossing your fingers and toes for a Santa Claus rally, look for a low-risk technical trade to close out the year.

That way if European news headlines take the markets down even further over the next few weeks, your downside market risk will be tightly controlled.  But if Santa decides to give us a market rally to close out 2011, this trade I’m about to show you should fill your stocking with some extra holiday spending cash.

This trade is developing quickly so let’s get to it…

In late November and early December, I heard lots of talk about buying gold stocks.  Proponents of gold stocks gave every reason under the sun for why these stocks are undervalued… and how it was time to buy.

But I steered clear of gold stocks for one reason… there was no edge for a trade.

Let me show you what I mean…

The Market Vectors Gold Miners ETF (GDX) is a great way to track gold stocks.  This highly liquid ETF holds a basket of top-tier gold producers.  You can even buy this ETF and gain exposure to this notoriously wild sector.

But you have to be careful with GDX…

This volatile ETF is famous for moving quickly and catching investors on the wrong side of the market.  That’s why you need to have a definitive edge if you’re going to step foot in this market.

In other words, you want to buy GDX when the odds are the highest for a move in your favor.  In fact, you should only enter a trade in any stock or ETF when you have a definitive edge.

But it’s especially important when you’re dealing with a volatile ETF like GDX.

As you can see, shares of GDX have traded in a wild range between the $52 support area (green line) and the $62 resistance area (red line) year to date.  Time and again, GDX has rallied off the $52 technical support area only to head lower once it reached the top of the trading range.

But in early December, when there was a market buzz about buying gold stocks, GDX was trading around $60… smack dab in the middle of the range.  At that price point, there was no edge to support a trade.  In other words, GDX had just as good a chance of going down as going up.

And down it went…

As you can see, GDX has taken a nasty fall over the past few weeks. Shares have plunged from the $60 area right down to the $52 support zone.  And that presents a perfect low risk buying opportunity.

Why?

Notice how GDX has screamed higher off the $52 support area multiple times this year (blue circles).  Odds are it’s going to do it again this time.

You see, if you’re looking for low-risk technical buying opportunities, it’s best to buy as close to a major support level as you can.  That way you have a solid point of reference to control your downside risk.

In other words, if GDX breaks solidly below $52, you should close this short-term trade for a small loss.  But if GDX rallies, you’ll be sitting on large gains a few weeks down the road.

So don’t let this humbug market ruin your holiday season…

A low-risk technical trade is just what you need to get back into the holiday spirit.  And this trade in GDX fits the bill perfectly.

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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