The Tycoon Report

Sector Timing: When to Pull the Trigger

Thursday, December 11, 2008 | Bob De Dea

Note: This is the final installment in a three-part series introducing you to sector investing. In case you missed the other two, they can be found here:  Confessions of a Sector Hunter and Mastering Sector Rotation.

Once we’ve decided what big game we’re hunting, once we’ve taken the time to study its habits, to follow its track record, to learn its strengths – then comes the big question: When do we make the move and pull the trigger on the trade?

Different hunters have different preferences when timing a trade. In the ETF Master Hunter program we make use of Sector Hunter signals, relative strength, and other technical measurements that I can’t go into. So I’m going to give you the simplest way that I know to determine when to make the move to purchase a security: the P&F chart.

I’ll take for an example an ETF that represents the gold stocks in the precious metals sector, GDX. It’s important to make sure an ETF is representative of the sector that it is said to cover. This, by the way, is not a pure gold bullion play – there are ETFs that can be used to play the straight commodities too – this ETF comprises stocks of companies involved in the mining for gold and silver (it tracks the AMEX Gold Miners index).

We’ll make a couple of assumptions here:

• We’ll assume that the sector is on a relative strength buy signal (which at the time of this writing it is)
• We’ll assume that the Bullish Percent Index for the precious metals sector is in a column of Xs (ditto, this sector recently hit its lowest level since 2005, at 2%; currently it’s at 22%)
• We would also be concerned with the security’s relative strength but, in this case, it is alone in representing the gold and silver mining industry.

Let’s look at GDX from Sept. 4 - Sept. 17, 2008.


We can see that at this point (Sept. 4), the ETF is in a column of Os, but that it hadn’t breached past support at $32 (it closed at $32.18). That’s a good sign. Let’s look at it a week later, on Sept. 11.


Uh-oh, the former support at $32 was broken. But the downtrend ceased at the former resistance level of $27. I wouldn’t be buying this at this point. I would want to wait for a reversal in line with the rest of the sector. Let’s see what happened over the course of the next two weeks.
   
GDX stopped its downward trend and reversed upward, rallying to its previous support level at $32 before descending again. Now I would be honed in on this animal and am waiting for the opportune time to pull the trigger.

No one can assure me that the time will be perfect, or that I won’t slip up and miss or that the animal won’t do something unexpected or that the gun won’t jam. It doesn’t matter. I’m a seasoned sector hunter and I know what to do when I see it. Whatever happens after that, happens, and is out of my control.

When I see GDX rise again and pull past that $32 support level, I should buy it and ride it. That would have happened on Sept. 17 (as indicated by the arrow and green circle – this is an example of a P&F Buy Signal). I could’ve gotten in somewhere between $30.11 and $34.10. On Sept. 22 I could have sold it for around $38 (at least 12% profit). It closed on Sept. 25 at $36.40. (The sector hunter doesn’t leave everything up to chance: Use a stop loss as a “protective cover” to prevent excessive loss.)

Now a more courageous hunter might have jumped in as soon as it changed from a column of Os to a column of Xs. They wouldn’t have had to wait long because that first reversal took place on Sept. 12. That hunter would have seen an even greater profit from tracking the wild GDX.

I’ll finish this series with something I said at the very start of this series: It’s the job of the big game hunter to know his or her prey. Take the time to get to know a sector, then get to know its representative ETFs. Track them well, learn their habits, observe their territorial boundaries.

Then, when the time is ripe, grab your fedora and gun, and go out and bag the big game.

Tell ‘em the Big D sent you.






Bob De Dea
Guest Contributor
The Tycoon Report