Stock Quotes in this Article: AUY, DGP, GFI, GLD, NG, SA, XHB

By Roberto Pedone
Posted on Aug. 24, 2010

The S&P 500 is dropping for the fourth straight trading session on Tuesday as investors digest a very disappointing existing-home sales number for July now that the expiration of the homebuyer tax credit is in full affect. Existing-home sales plunged 27.2% to 3.83 million units in July from a downwardly revised 5.26 million in June, and were 25.5% below the July 2009 level of 5.14 million units.

Some market-players are concerned that the chances for a double-dip recession are growing by the day, which is inspiring a shoot-first-ask-questions-later type of response to equities. Market-players are pretty much dumping anything that they can find a bid for. The selling was intense enough to momentarily push the Dow Jones Industrial below the key psychological level of 10,000.

As I write this, 480 of the 500 stocks in the S&P 500 are trading lower. That is a pretty amazing statistic, and it shows just how weak the stock market is across the board in almost every sectors.

However, as I scan across my screen looking for anything that might be bucking the trend and trading higher, I find really only a couple of sectors that are showing any meaningful buying interest. One of the few sectors that is working today is gold, as represented best by the action in the SPDR Gold Trust (GLD).

Just for observation purposes, I will also point out that the SPDR S&P Homebuilders ETF (XHB) is trading fractionally higher, but I believe that could be due more to short-covering since the sector is heavily in control of the bears.

The gold sector, to me, feels a lot more like real buying and real demand. Although I am sure there are plenty of bears circling that sector as well. The problem with the bears in the gold market is that they have been ridiculously wrong. Year-to-date the SPDR Gold Trust is up 12%, and in the last five years it’s up a gigantic 175%.

A perfect storm might be forming in the gold market, with a lot of things working in this commodity's favor at the moment. First of all, the shiny yellow metal tends to get lots of money flow when there is a tremendous amount of fear in the markets, and it’s hard argue that the market isn't being driven by a lot of fear right now. Second, we are quickly entering a seasonally strong period for gold and an even more seasonally weak period for equities.

Let’s also not forget that some of the biggest players on Wall Street have been adding to their positions in gold. Well-known hedge fund managers such as John Paulson, George Soros and Leon Cooperman have been adding to their positions in the SPDR Gold Trust ETF.

Here ‘s a look at a number of uptrending gold stocks that are bucking the overall market trend downtrend and could be setting up to trade much higher.

If you’re looking for the best and most liquid way to play the gold market (besides trading the futures), I would suggest you consider the SPDR Gold Trust ETF. This gold ETF is designed to reflect the performance of the price of gold bullion. Plain and simple, if gold trades higher, so will this ETF. This exchanged-traded fund tracks the raw price of gold on a 1:10 price ratio, so you’re pretty much going to capture the same moves that will happen in gold futures.

From a technical standpoint, the GLD is bouncing nicely off the 50-day moving average of $118.36 a share today. Market-players who’re bullish on this ETF should watch for a breakout above $123.56 a share. If the GLD can push above that level, and especially close above that level, it could mean much higher prices are in store in the near future.

Another way to leverage up on going long gold is to buy the Deutsche Bank AG DB Gold Double Long ETF (DGP). Many investors would take issue with this recommendation because of the amount of volatility and slippage that can occur with leveraged ETFs, but let me just say for the record that this type of instrument is for trading only -- not for investing.

If you’re looking for some gold miner stocks to play the potential uptrend in gold, I would suggest searching for the names that have some decent short interest. If we do get a nice push higher in gold, the heavily shorted names will experience some substantial short squeezes.

According to FactSet Research, gold stocks that show up on the most heavily shorted list of Amex stocks as measured by a percentage of their float include Seabridge Gold (SA) at 12%, Novagold Resources (NG) at 6.4%, Great Basin Gold (GBG) at 5.6% and Golden Star Resources (GSS) at 5.1%. Keep in mind that some of these stocks are very speculative, but if gold is going to make a big run, you’re going to have some good short-squeeze trading opportunities in these names.

Two NYSE gold stocks that have had a substantial positive changes to their short position recently are Yamana Gold (AUY), which saw its short interest jump 108%, and Gold Fields (GFI), which saw its short interest soar 40%. Keep in mind that both of these companies’ total short potions as a percentage of their float is still very small. However, the fact that shorts are adding aggressively to these stocks is worth noting.

A more conservative and safer way to play the gold mining sector is to buy the Market Vectors Gold Miners ETF (GDX). This ETF seeks to replicate as closely as possible the price and yield performance of the NYSE Arca Gold Miners Index. Some of the top holdings of this fund are Newmont Minding (NEM) and Barrick Gold (ABX).

To see more gold stock plays, such as Goldcorp (GG) and AngloGold Ashanti (AU), check out the Top Uptrending Gold Stocks of the Week portfolio on Stockpickr.

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At the time of publication, author was long call options on the GLD.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and