Technical analysis on gold majors – bottoms not where you thought.
The following article originally appeared as a blog entry by cmunny on the blog Master Resource Trader. Click here to read and comment on the original entry.
Summary: We further explore signs from mid-July that a bull-trap was in the works for gold majors. (See these blog entries from July 11, 14 and 15 as originally posted.)
Continued heavy selling through long-term support lines on July 23 indicated lower prices, not bottoms. We continue to look for somewhat lower lows in some issues, though trading ranges above and below current prices are at relatively even short-term odds. Long-term odds become much more favorable for solvent companies. Some early washouts are pressing toward bullish breaks of short-term trendlines.
Well, we keep getting new calls for lows out there. In baseball, it's three strikes and you're out. In calling stock lows, it's three strikes and you're out, too - out of money! We shouldn't trade lows much differently than any point else on a stock's cycle. We should always be focused on odds and definable ranges, but we'll look at that in an upcoming entry.
As we covered in Part I of this series, with major gains over the past few years, it shouldn't have been a surprise that profit-taking and short-selling were going to come into the precious metal (PM) sector. Major volumes with attendant price divergences at multi-year channel tops were apparent all throughout 2007, especially in early November.
We looked at Esperanza Silver (TSX: V.EPZ, Stock Forum), a "quality" junior explorer that topped out early in 2007. Let's look at Silver Standard Resources (NASDAQ: SSRI, Stock Forum), the preeminent silver junior, as it topped out after its 40-bag run with most of the other juniors in November of 2007. The point here is that studying these patterns would have shown what was coming for the gold majors as we move through 2007, into March 2008, and finally July 2008.
The SSRI three-year chart has many of the same characteristics as EPZ. We have mega-gains, with a parabolic run into the upper trendline of a multi-year channel, over a number of unfilled gaps. At tops like these, retail investors rip there shirts (well, male retail investors) open, beat their chest, and proclaim they are finally getting their just desserts. In fact, usually they are just about to get their butts kicked. Focusing on the bigger picture, we can see that SSRI has had a truly remarkable run, but was actually making no progress through $40 for over a year.
Ominously, into 2008, we began to see lower highs even as silver bullion and some gold majors smoked upward. Further, the (blue) multi-year support line was in danger of giving out, and 50- and 200-day moving averages were rolling over into the "death cross" pattern. Short positions were also increasing, much to the protestations of permabulls, who think this company can do no wrong. One can debate this, but the pattern collapsed, as we predicted elsewhere. This is classic relative weakness vs. sector peers and the fundamental driver of the company's stock, the silver bullion.
As an aside, but more germane for the moment, we can see SSRI is now holding up quite nicely in the $31-$27 range and chomping at the bit to get through the sharply descending wedge from the November 2007 highs. There are some gaps just below this price area that may fill as the gold majors slog around, but these would appear to be great longer-term reentry points. There has been no hurry to make multiple, costly guesses at the bottom here. Just connect some dots from lower high to lower high, and when a stock can beat that down trendline, you'll be heading in the right direction again.
With the picture of SSRI in mind, let's look at Yamana gold (TSX: T.YRI, Stock Forum). YRI was one of the lucky few that were on the long side of the bifurcated trade in the PM markets the past seven months. However, like its junior predecessors, YRI was also setting up in very similar topping patterns. We have been following YRI specifically in the blog since around July 11. Here's a screenshot from around that time period, a couple of days before gold topped out:
Notice any similarities to SSRI from around mid March? YRI went from $2 to $20 in three years, went parabolic into the upper parallel trendline, yada yada. But again, ignoring the head fake up to $20 in March, there is a manhole cover over the price at about $16 going back 18 months. There was heavy selling volume off the highs.
Further, there is a textbook head-and-shoulders top in place, with YRI a full 25% below its old highs as gold and other majors re-challenged their highs. As Charlie Chan used to say, "Hmmm. sumsing wong." And to top it off, we can see the free-fall potential with not one, but two, multiyear uptrend channels about to get taken out. That is why we made outright short calls on YRI on July 15 at the same time other TA analysts were giving ETF-based momentum breakout "buy" signals.
To follow on, we can see the massive 20 million share megaton bomb that was laid on YRI as it sliced through those long-term support areas at $14 to $13.5. Now, this is not how bottoms form - except in your account, if you listen to someone who is not following price and volume action and money rotation market-wide.
On the following screenshot, on the lower intraday chart, we put a horizontal black line through the dead-drop, high volume red bearish bar, which was at about $13.30. There was very little chance of going back through that price any time soon. And the psychology of this situation - go read the Yamana Bullboard - is that everyone who thought they were pretty sharp being in the majors, has lost all their profits and heading for more pain. This price action creates a selling feedback loop that takes prices much lower, regardless of any bogus index ratio. And we have continued bearish even as the XAU:gold ratio guys have trotted out two more bottom calls.
Price targets after breakdowns
There are several things to look for in a strictly technical breakdown in a stock price. After such a large run, a good first guess is to put a retracement tool over the last major run-up in a chart and look for a 50% giveback. Look for gaps to be filled and areas of prior strong buying interest. For SSRI, that pointed was toward $24, and even $20 on. Many stocks have been giving back more than that. The fact that SSRI has not and is currently holding up well under girds the well-known massive silver resources they possess.
For YRI, using this method, we have $10.50 as 50% retracement, and around $9.30 for a 62% retracement, which is also in the area of the August 2007 lows. We're close to the first target, at $10.50. But there are still gaps below, and the heavy selling was only 15% higher, and we ultimately expect lower prices, though the trading range back up to last week's lows and down to projected lows is getting close to a 1:1 risk/reward area (not pictured).
AEM megaphone top
Another major, Agnico-Eagle Mines (TSX: T.AEM, Stock Forum), went from the leading growth gold stock to just another post-mania, base metal producer in about three days. Whatever. The recent trading in AEM has less to do with fundamentals than fundamentally exasperating "investors" and taking their money.
The "megaphone," or broadening top, is an especially exasperating, "fool-me-once, fool-me-twice" topping scenario to separate people from their cash. AEM had the "strongest" chart of all, and looked ready to go higher, not only once at point A on the chart, but also at point B, before slicing back through fake pennant breakouts on both occasions. This is a high-volume bull trap, NOT a bottom. Yet the same day we posted this, the index ratio guys were calling for major bottoms. We're well toward the $45 target, which is another 50% retracement area. But who knows, we've actually been way too bullish on a lot of these.
The point is, just looking at a ratio, or a few easily manipulated liquid stocks or ETFs, led a lot of people into a major hit in July. A more comprehensive approach showed:
1. Weakness throughout the PM sector. Major market moves are not going to leave 95% of the stocks behind;
2. Relative weakness and shorting in stocks like YRI that were faltering leaders;
3. Very overbought, parabolic moves over gaps in the few stocks / ETFs still going up, such as Goldcorp (TSX: T.G, Stock Forum) and AEM;
4. Heavy volume coming in at the top in the leading stocks;
5. Repetitive money rotation patterns out of the PM stocks, finally getting to the majors this past month.
Disclosure: Author has no position in Silver Standard Resources.
This article was written by a member of the Stockhouse community.
Visit cmunny on the blog Master Resource Trader for more stock price analysis.
