Last week we wrote that Gold and gold stocks had made a short-term low, and a rally was likely.

Gold has rallied above $1800, but someone forgot to tell the gold stocks and Silver. Gold gained $27/oz last week, but GDXJ lost 1.8%, and GDX was flat. Silver lost 1%.

As I pen this, Gold is roughly $60/oz above its recent low, while GDXJ is trading around its recent low. GDX hasn’t fared much better.

When Gold rallies but the other parts of the sector do not or have a weak recovery, it’s a signal that more downside is looming. 

GDX is trading near $34 and has strong support at $30.

The breadth indicators, shown at the bottom of the chart, are oversold but not quite at an extreme. 

I’d like to see the bullish percentage index (BPGDM) come down to 25% or below and the percentage of HUI stocks above the 200-day moving average (smoothed by a 20-day average, come down to 15%). 

(Click on image to enlarge)

GDX w/Breadth Indicators

Meanwhile, GDXJ is trading at $45.55 and has support around $41. 

A simple look at the percentage of GDXJ stocks trading above the 50-day moving average and 200-day moving average shows GDXJ is fairly oversold. I would like to see the percentage of GDXJ stocks above the 200-day moving average (smoothed by a 20-day average) decline to 15%. 

(Click on image to enlarge)

GDXJ w/Breadth Indicators

When a market is correcting and relatively weak, as we can see with the gold stocks (not doing much as Gold rallies), it is best to remain patient and let the market reach an oversold extreme.

Also, price action is most important. 

I’d like to see oversold extremes if GDX and GDXJ are trading 10% lower and at strong support levels. That could facilitate the potential for at least a multi-month rebound and some excellent entry points in quality juniors.

In my experience, buying fundamental quality at oversold points and then holding for several years is how to earn returns of 5-fold and more.

I’ve positioned myself in companies with the best combination of upside potential and fundamental quality. These are companies you can buy and hold for a few years that have the potential to be 5,7, and 10 baggers after Gold breaks past $2,100/oz.