Monday, May 17, 2010

Gold Stocks vs. S&P500

Above is a daily chart of GDX (Gold Stocks)  and in the lower panel is a ratio line of gold stocks vs the S&P500.  You'll notice every time the ratio line rises above the red horizontal line followed by a downturn back below this line, gold stocks tend to sell off. What this means is gold stocks are becoming overvalued relative to the S&P500.

One other item of significance is that GDX is at long-term resistance at a time when GDX is overvalued vs the S&P500.  I'm not suggesting that we short the gold stocks here but rather if you are long GDX you might want to raise your trailing stops to lock in any gains that you may have.

1 comment:

Anonymous said...

Good chart. I have been using it myself in the last couple of months and I find it useful. I caught a few intermediate bottoms in GDX. Now, It's flashing sell like you mentioned. The only thing I'm not sure if this is a mild sell like Sept 09 or a major bear like July 08. The chart look similar to both points.
I exited all my long gdx/slv holdings at the top a few days ago. I'm surprised about little weakness in these in the face of the recent sell offs. However, I noticed weakness in SLV in the afternoon yesterday while the energy and general stocks rebounded. Thus, I opened a small position in SLW puts, as SLW is way ahead of SLV. Time will tell, so far I'm above my stop.


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