The financial markets are sometimes generous with second chances. But they are stingy when it comes to third chances.
Right now the “trading gods” have delivered us a wonderful second chance to buy the Top 10 Best Gold and Silver Stocks.
The question is… do we buy them now?
Take a look at this chart of gold (on the left) and the big gold stock fund, GDX (on the right):
Firstly, you will notice that both gold and gold mining stocks (GDX) have significantly come down since their March highs.
In fact, the bearish Pro Divergence signal which occurred in early March was a very useful warning to us that there was weakness in the upward trend in these markets.
Traders who took action on this warning managed to keep most of their profits before gold dropped.
However, the second thing you’ll notice is that the drop in both gold prices and GDX is actually not too worrying. It is quite “normal”.
What do I mean by “normal”?
It is perfectly normal for markets to retrace 50% or sometimes 61.8% of their previous moves (see green and red lines).
Right now gold has retraced 50% of its January-March rally, and GDX has come to its 61.8% fibonacci level. These levels tend to provide a good support to price.
Question is… will gold and GDX hold these levels?
As I mentioned in my last update on Gold, gold investors will have to decide now whether they will step in and rescue the yellow metal or not. The 1280 to 1265 level is going to be critical for gold to hold.
Remember that precious metal stocks, no matter how good they are, are going to be strongly influenced by what happens to gold and GDX. If gold (and GDX) continue to go lower, precious metal stocks will be dragged down kicking and screaming.
I personally have started re-buying gold from 1280 this week. I am prepared to continue buying down to 1265, and see if we can get a bounce from here (be careful as gold can blow through your stops!).
In regards GDX, I am going to wait for it to make a reversal and close above its 50% level before I decide to buy into precious-metal stocks again. Cautious investors can wait until GDX has closed above $25.
UPDATE: Gold has finally managed to bounce from 1280 level and has seemed to find a floor at that level. We are beginning to clear resistance at the 1310 level. Once cleared, we can see gold moving higher to 1350.