Is It Time for Gold Stocks Yet?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Banister

NEW YORK ( TheStreet) -- One of the most common questions I field from my forecast and trading subscribers is can we buy gold stocks yet? We have seen gold consolidating and correcting, following a 34-month rally that I discussed last fall was going to top out around $1,900 per ounce. This type of rally went from October of 2008 to August of 2011 and we saw gold rally from $680 to $1,900 per ounce during that time.

In order to work off the bullish sentiment that was at parabolic extremes, gold is required to spend a reasonable amount of time in relation to the prior 34-month move to wash out the sentiment and create a strong pivot bottom. While this continues, the gold stock index has taken it on the chin as money rotates out and into other hot areas like technology and the Internet 2.0 social media boom. To wit, the Market Vectors Gold Miners ETF ( GDX) peaked out last fall around 67 and current trades under 47 as of this writing.

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However, there may be a silver lining developing in those dark mining stock clouds very soon. It does appear that we are in the fifth and final wave of this pessimistic decline in gold stocks, per my GDX ETF chart below. A typical bottoming pattern ends after five clear waves have taken place, and in this case I have targets between $43 to $47 per GDX share for a likely pivot low in Gold stocks. Contrarian investors may do well to begin picking the better names in the sector and "scaling in" over the next short period of time.

Gold itself has recently corrected from $1,793 per ounce to $1,620 in the last several weeks. This has spooked the crowd out of gold and put further pressure on the gold mining stocks as well. Should Gold hold the $1,620 area and rebound past $1,691 you will see the gold stocks take off just ahead of that. From these 43-to-46 levels, the GDX ETF will provide very strong returns to investors with iron stomachs.

The best way to make money long term in the market and to grow your capital is to develop a method where you can define your risk levels within reason near the apex of a downside move, and then scale into that final apex and catch the rally on the upside. This is difficult to do but at my ActiveTradingPartners service we have developed a strong methodology that takes advantage of "herd behavioral characteristics."

We have not yet bought into the gold stock sector, but I assume fairly soon we will be dipping our toes in the water, right near the apex lows.

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