Gold and the Raiders... Here We Go Again

It's probably the best low-risk opportunity in the market right now... but I don't have the guts to do it.

 

It's shorting the gold sector.

 

As you can see from today's chart, gold stocks, as measured by the AMEX Gold Bugs Index (HUI), have rallied right back up to the top of their trading channel. If there was ever a time to short the gold sector, that time is now...

 

 

 

Right now, aggressive traders can short the sector with the HUI trading for about 360, and then place a stop on the trade at 370 to protect capital. That limits the risk to only 3%.

 

The logical downside target for the trade is the rising support line at about 305. That's a potential gain of 55 points, or roughly 15%.

 

So the potential reward is five times greater than the risk, and it's a smart trade to make. But I just can't do it...

 

It's like betting against my beloved Oakland Raiders. Instinctively, I know the Raiders are going to lose most of the time, and it's smart to bet that way. But I've been a Raiders fan since I was five years old, and it's torturous to root for their demise.

 

I feel the same way about gold. I've been a big fan of gold for the past six years. But ever since the sector topped out last May, watching gold stocks as they approach the upper end of their trading range has been like watching the Oakland Raiders carry a lead into the fourth quarter. You want to believe we'll see a victory, but deep inside, you just know it's going to end badly.

 

The past three times the HUI approached this level, I wrote cautionary comments in these pages. Each time, the HUI hit resistance and then drifted lower – and investors with the courage to short the sector made good money.

 

Gold stocks are once again approaching resistance, and the odds favor another turn to the downside.

 

I haven't yet been able to bring myself to short the sector. But that doesn't mean you shouldn't. After all, you might be a Broncos fan...

 

Best regards and good trading,

 

Jeff Clark

• Charles Brandes' Favorite Telecom Play
  By Graham Summers Monday, April 9, 2007
  
• How to Time the Stock Market
  By Jeff Clark Friday, April 6, 2007
  
• Big Future Ahead for Little Silver
  By Matt Badiali Thursday, April 5, 2007
  
• Retail Bounces Back and the Legends Buy More
  By Graham Summers Wednesday, April 4, 2007
  
• The Semis Look Ready to Rally
  By Jeff Clark Tuesday, April 3, 2007