TheDailyGold: Gold Stocks Oversold & Approaching a Bounce
One simple, but effective, investment strategy is to look for stocks or sectors that are oversold or overbought. A stock that has a fantastic rally might attract attention. However, even a great company can see shares move too far, too fast.
Likewise, it’s best to avoid a stock in a downtrend. At some point, though, assets can become too oversold. Then they tend to have a strong bounce.
Investors who can avoid buying overbought stocks and who buy oversold stocks can likely see market-beating gains. Currently, gold stocks look oversold.
A number of factors drive that analysis. Looking at the percentage of gold stocks under their 20- and 50-day moving average is one sign. It shows that the market is ignoring these stocks. And that could mean shares have now fallen too far given that they’re now out of favor.
In the meantime, gold stocks tend to move relative to gold prices. Gold prices are coming down, but appear to have long-term support in the $1,850-$1,900 range.
Traders looking for a contrarian opportunity here could find one with gold stocks in the coming weeks. A modest move higher in gold prices of 10-20 percent could mean a 20-40 percent move higher for major gold mining stocks.
Just beware that this sector tends to be more volatile than others. And when gold is out of favor, gold mining stocks tend to get heavily punished. That’s why this space works well for oversold bounces.