Market Vectors Gold Miners (GDX)

[winston]

CHART OF THE WEEK: THE GOLD STOCK DIVERGENCE CONTINUES

Our chart of the week shows the "gold stock divergence" we highlighted months ago is still in place.

For much of 2010, gold stocks and the broad market increased at roughly the same pace. Then, when the market stumbled in April, the two diverged. The broad market kept falling. But gold stocks remained solid, supported by the incredible strength in gold.

As you can see from the "performance chart" below, this divergence is still in place. Gold stocks (the black line), are showing positive returns and climbing. The S&P 500 (the blue line) is showing negative returns and falling.

Gold stocks are typically viewed as a riskier asset… so it's incredibly bullish action for them to remain so steady in the face of terrible stock market weakness. Stay long "the golds."


www.dailywealth.com

[winston]

Not vested

CHART OF THE WEEK: Gold stocks are crushing the market

We're using this week's chart to update the big "gold stock divergence" idea we told you about in June.

To recap, gold stocks started 2010 trading in lockstep with the general stock market. But early this summer, with the robust economics of digging gold out for $500 per ounce and selling it for $1,400 (instead of $900), gold took over… and gold stocks, as represented by the big gold stock fund (GDX), started rising much faster than the general market.

This week's chart compares the gains generated by gold stocks (black line) versus the gains generated by the broad market (blue line) As you can see, gold stocks are up nearly 35% this year… while the broad market is up 11%. And the divergence is getting bigger and bigger. As the gold price remains elevated, expect this trend to continue.


www.dailywealth.com

[winston]

AN IMPORTANT LEVEL FOR GOLD STOCKS

Near the top of our watch list right now: GDX and the $52 level.

Back in the dark days of December 2008, we tagged gold stocks as one of the market's leading "rebound" candidates. The sector was the definition of "beaten up and left for dead."

The "golds" behaved as we expected… and gained 116% over the following 12 months.

But as you can see from today's chart, the gold stock rally stalled in November 2010.

The bulk of investors simply don't believe gold companies will enjoy years of robust gold prices. GDX, the big gold stock fund, has treaded water for the last year.

We see the makings of a low-risk, potentially high-reward trade in gold stocks and GDX right here. The fund has dipped down to the $52 level several times in the past year…

And it's rallied each time. If gold holds steady here, these cheap stocks will rally again. One can buy with a tight stop loss around $52.

www.dailywealth.com

[winston]

HOW TO MAKE A LOT OF MONEY IN GOLD STOCKS

The recent price action in gold stocks is why "buy on pullbacks" has become a useful trading cliché…

Just over a week ago, we pointed out how the big gold stock fund (GDX) presented a low-risk, potentially high-reward trading opportunity.

This trading idea has been a winner… Gold stocks have ripped higher.

As we've profiled many times, gold stocks are cheap right now. And higher gold prices are putting the wind at their back.

But they've suffered big selloffs at various times this year. With the bullish fundamental setup for gold stocks, these selloffs make interesting opportunities to trade from the long side.

To illustrate this idea, we present the past two years' trading in the GDX.

At the bottom of our chart is an extra "window" that displays an overbought/oversold indicator called "RSI."

When the RSI is over 70, gold stocks are stretched to the upside and due for a correction. When RSI is below 30, gold stocks are stretched to the downside and due for a rally.

Each time the GDX has reached oversold levels, it's been a good bet to rally… or as the cliché goes, "Buy on pullbacks!"

www.dailywealth.com