Though gold and silver were able to make new highs in recent months, the gold stocks (as evidenced by GDX (large caps) and GDXJ (larger juniors) never did. My firm wrote about their relative weakness and how it was a warning sign for the sector. The shares failed to breakout and have fallen back into their consolidations at a time when the sector tends to consolidate and correct.

Below I show GDX and GDXJ. For each chart you can see the 300-day MA and support and resistance points.


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I also have a chart from sentimentrader.com, which tracks the assets in Rydex’ Precious Metals Fund. It is a sentiment indicator.


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Note that both the assets in the fund (nominally) and assets relative to other sectors are way below their highs. In fact, they are closer to their lows.

The financial media, day trading types, and retail crowd have now forgotten about the sector. Should you? Absolutely not. This is when the real professionals make money and when the average Joe’s struggle.

The typical trader and investor loves to buy strength. There is nothing wrong with that. However, gold stocks are a different animal. There are numerous false breakouts and false breakdowns. For example, GDXJ gave us a false breakout last month. In 2010, GDXJ had a false breakout in May. The best strategy for a volatile sector in a bull market is to use the volatility to your advantage.

Let’s use GDXJ as an example. The market is at $37 with support at $33-$34 and resistance at $39-$40. If you have some patience, you can buy at $34-$35 and wait for a potential breakout. If the market breaks below $33, you can sell. However, if you wait for a break of $39-$40, then you are already missing out on some upside. Need we mention that a buy at $34-$35 carries less risk because it executes at technical support and likely when sentiment is not positive.

Apply this to your favorite large and junior gold stocks. Identify points of support. If the precious metals follow their typical seasonal pattern, odds are you will have a few chances to nab your favorites at a time when others are panicking.

Editor's Note: See more of Jordan Roy-Byrne's content at The Daily Gold