Gold stocks are about to explode higher.
The price chart looks amazing. The fundamentals are all lining up.
Today I’ll explain why this is one trade you should be really excited for…
For most of the year, gold stocks have been weighed down by the strength in the U.S. dollar. Remember, gold is priced relative to the dollar.
Generally speaking, a strong dollar can suppress the value of gold. But now the dollar is getting ready for a big reversal.
From July 14 to October 3, the dollar index rallied nearly 8%. That’s a big move in a short amount of time for a currency. But since putting in a top on October 3, the dollar index is already down nearly 3%.
That’s due to the market’s belief that the Fed is done raising rates. Higher interest rates tend to strengthen the dollar.
As the amount of yield on the currency increases, the dollar begins to attract investment flows away from other asset classes.
Now that the market has hope that interest rates won’t go higher, the dollar is beginning to be repriced lower. And fundamentally, that should be great for gold.
But it’s not just the fundamentals that are bullish for gold stocks. The technical picture also looks promising.
Take a look at this price chart of the VanEck Gold Miners ETF (GDX) below:
GDX has now finished tracing out the right shoulder of a larger inverse head-and-shoulders pattern. This is a textbook reversal pattern.
Once it breaks out, it should lead the market to much higher prices.
The target for the pattern is simple to calculate. All you have to do is measure the distance from the head to the neckline. Then take that distance and project it higher from the neckline itself. Fort this pattern, that gets us a target around $34.58.
If GDX can reach its target, it would make for one epic trade. It would also mean that gold stocks would be trading back where they were in May.
On the other hand, if GDX drops below the right shoulder, then the bigger picture would have to be reassessed. The price level for the right shoulder comes in at $27.
It’s easy to be blinded by the potential gains on a big trade like this one. But it’s even more important to focus on risk management. That’s why it’s essential to have a good exit plan in case the trade goes south.
Happy trading,
Imre Gams
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Source: Jeff Clark Trader