Friday, October 13, 2006

Breakout or fakeout?

Today was a significant day in the natural resources sector. After a major headfake in September that gave a false signal that the traditional fall rally was underway, natural resources stocks have been retrenching ever since. Whether today marked a turn or just another headfake can only be concluded after the fact. What can be said though, is that price and volume action was strong across the board. Price and volume action was encouraging in oil stocks, uranium stocks, base metal stocks and precious metal stocks. The action cut across market caps, too, lifting the seniors, mid-tiers and juniors.

Valutrader on Silicon Investor put today's action in historical perspective:

Nothing is for certain, but FWIW an historical pattern worth noting is that after a strong breakout Friday like today and a short pullback after the gold market closes

1. they run the stocks up into the close
2. there is a burst up Monday morning which is sold
3. Monday and Tuesday drift lower
4. Wednesday firms
5. Thursday and Friday push higher

As always, we'll see.

On breakout days like today, the juniors tend to rocket off the bottom. Even though these stocks are doing little more than recovering recently lost ground, looking at the percentage gains discourages those who have traded out from buying back in, as it feels like chasing. Here are a handful of my best performers today:

DNT.TO 15.38%
PEZ.V 23.26%
SCM.V 12.58%
UC.V 10.20%
UPC.V 16.67%

Without a doubt there are now some gaps on these charts that may have to get filled, but that would also be consistent with the scenario laid out by Valutrader. If this move is for real, then these gains show where these stocks are headed. Also, even though the summer is over, the drilling programs are not. If significant results can be produced during a time when market conditions are favorable, then the impact on share price appreciation can be magnified. Let's see what happens next week...

No comments: