-- Posted Thursday, 2 February 2006 | Digg This Article
An excerpt from an e-mail recently received:
“…I write not so much to seek stock recommendations but to learn how to find and assess the value of such opportunities.
I am convinced that you are correct, that good opportunities are plentiful, it is just that they are in amongst some bad ones as well.
It may seem an obvious question, but I am trying to learn a reliable method of appraising mining and energy stocks….”
Thank you to the reader for his e-mail.
It’s an interesting question.
My ‘technique’ for stock picking may be quite different to a lot of investors in the gold and energy universe.
This has prompted me to write a 2-part editorial on how I generate my gold stock picks.
I hope you find it interesting!
Stock Picking
Before talking about individual stocks, we should ask whether there is any reward for individual stock picking?
My answer: Most of the time it is very difficult to beat an index.
The key here is ‘index’.
Unfortunately in the Resource sector there are too few tradeable indexes.
Sure there is the HUI and the XOI.
And there are many proprietary indexes.
But most investors are picking stocks for themselves, especially in the Junior sector, where there are very few tradeable indexes or funds.
The Golden Universe
What I would say to my reader above is that before looking at individual stocks, it is imperative to know what the broader Gold stock universe is doing.
As Jesse Livermore mentions in the classic – Reminiscence of a Stock Operator – the Big money is made in sizing up the whole market, taking a position and sitting tight for the entire movement!
If the broader gold universe is not going higher, it is very difficult to pick individual gold stocks that are!
The majority of us would agree that Gold, Uranium and the commodity complex are in secular bull markets.
If prices are going up on average over time, the critical question to ask is where are we in the intermediate timeframe?
Is it time to buy / add to your portfolio?
Or is it time to take a little off the table?
Lets take a look at the Amex Gold Bugs Index (HUI) to get a feel for where we are at this time:
Chart 1
Each trader has his / her own personal style.
Normally trading styles are so idiocentric that your identical twin would have problems making money out of!
Here’s a little tool I use that’s part of my style.
It’s a variation of Fibonacci analysis - if it is already in use I apologize in advance to its creator.
I have found that the % move of the previous wave multiplied by 0.618 (the Golden Fib) is a good basis to determine the magnitude of the next wave.
For example, based on the above chart the last move (in the large green rectangle) was 50% (250-166)/166*100). Multiplied by 0.618 and added to the last top gives a target of 327 (250+(250*(0.5*0.618)))
I‘ve learnt, from painful personal experience, that no top can be pinned to an exact number. So what I do is place a range of 10% above and below my target.
Therefore I am saying that this current wave should top out at no less than 295 (327*0.9) and no higher than 360 (327*1.1).
The current price of 340ish is now well into our ZONE so its time to look for signs of a top.
A top normally shows up after the RSI (top of chart) rises above 70.
It has!
And signs of divergences begin to appear.
Let me explain, if the RSI and MACD (bottom of chart) do not go higher than the red lines, this would constitute a divergence in that the price (small green rectangle) made new highs but the indicators did not.
Conclusion: the daily chart may be in the early stages of topping.
SHARP CORRECTION?
A lot of people are warning of a BIG, imminent correction in Gold stocks.
Let’s investigate:
Following the same logic, lets look at a weekly HUI chart.
Chart 2
The Green rectangle shows the upward wave preceding the current move.
The low was approximately 112 and the high was 258.
Using the same formulae as above, the move was 130% [(258-112)/112 * 100].
Applying the golden fib gives us 80% [130% x 0.618].
Extending from the last high gives you a weekly target of 465 [258 + (258 x 80%)]
Lastly, apply a 10% range either way to give you a potential weekly target of 419 (465 x 90%) to 512 (465 x 110%).
With a minimum target of 419 we are not yet close to the end of the current move from a weekly perspective.
Which means any correction from here will be a routine correction in the DAILY chart. We will be correcting the move that started at 214.30 (chart 1).
How much will we correct?
Honestly, I have no idea!
If I had to guess I’d say the breakout at 250 – 260 (highlighted in yellow) will be tested.
That’s about 25% below current prices.
MY ADVICE TO MY READER AT THIS TIME IS NOT TO BE A BIG BUYER!
If you have no exposure then perhaps a nibble here or there.
Worst-case scenario you’ll endure excruciating pain in a short-lived correction!
In a Bull market all mistakes are put right - if you can hold on!
In my opinion, now is not the time to plunge in.
Be patient.
A correction will come.
A 25% fall in the senior stocks will uncover some unbelievable BARGAINS in the juniors.
SECOND PHASE OF THE BULL MARKET
A bit of fun:
A few respected commentators say we have entered the second phase of the Gold bull market.
If that is the case then the first phase saw the HUI rise from 35 to 258.
Based on the same formula as above we can predict the HUI to top out in this second phase at around 1,300 [258+(258*(((258-35)/35)*0.618))]
Now wouldn’t that make us happy Bugs?
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In my next piece I will discuss the one and only factor I use to assess EXPLORATION stocks and other indicators to evaluate PRODUCERS.
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Greg Silberman CA(SA), CFA (Retired)
goldandoil@yahoo.com
I am a private investor in the resource sector.
Please visit my blog for more free articles and analysis
Click here: http://goldandoil.blogspot.com/
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
-- Posted Thursday, 2 February 2006 | Digg This Article
