At the first of the month subscribers to Trade Followers were able to see a long trade setup for gold stocks (GDX). The buy signal for GDX was a result of several factors. Trade Followers momentum started a down trend in September. The downtrend indicated that traders were selling shares and becoming more bearish on gold stocks as GDX fell. The price low in November 2014 showed capitulation selling with heavy volume on a swift drop. The next low in December was not accompanied by lower lows in 7 day momentum on Twitter. This indicated that traders and investors were accumulating shares and becoming more bullish on GDX even though price was falling. On January 2nd, 7 day momentum broke above its confirming downtrend line at the same time as GDX was breaking above its 50 day simple moving average. This created the buy signal.
For those of you who made the trade it’s time to start watching it closely. GDX is getting close to its 200 day moving average which is often a place that stocks pause or turn back down from a counter trend bounce. I often take profit by selling one third of a position when this occurs. When 7 day momentum breaks back below the newly confirming up trend line I take at least another third off the trade.
If I believe the downtrend is resuming at that point I’ll close the whole trade, but if the stock is still acting well when 7 day momentum is broken I may leave a third still in the trade. This allows me to give a short term counter trend bounce trade time to work into a long term holding using some of the profit from the two thirds I’ve sold as a cushion. Of course, a break back below the 50 dma, the newly established up trend line in price, or a break below recent lows would be places I’d reevaluate and decide if I want to continue to hold expecting a change in the long term trend or close the trade after clear signs the downtrend is resuming.