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January 8, 2007

Mining for Trades

Equities posted modest gains in today's action, and the intraday action of the SPX is suggestive of a near-term upside reversal.

stock chart

The pattern certainly warrants caution for those with a bearish stance. As a bear, however, I am more interested in seeking signs that stocks are weakening. For the last six months, each time the market suggested downside reversal, bids were put under stocks to drive them higher. It would be very encouraging to see the failure of a bullish setup or two, so let's see how this one plays out.

Precious metals prices stabilized a bit and mining shares held their own, with the notable exception of Newmont Mining, which fell 2% on a downgrade from Prudential. Prudential's opinion has no bearing whatsoever on my outlook for Newmont. This downgrade appears to be simply one of convenience since The Prudes' change of heart comes after NEM shed 10% in two weeks.

Silver Wheaton hammered off its trend line for the second straight session, raising my confidence in the trade proposed in Friday's post.

stock chart

Today's bounce does not constitute the high-volume reversal I sought, but back-to-back hammers are a positive development, and they induced me to open half the trade I was intending. If the hammers are confirmed with further upside, I will likely double up. The idea behind this trade is for SLW to begin an impulsive move to its upper bound and possibly break higher. Success will depend, of course, on the behavior of silver itself. The white metal is sitting on its own trend line, so the action in coming days is crucial to the near-term outlook.

On a final note, Research in Motion shares put in a spinning top candle with today's action.

stock chart

Remember that the word "top" in this candle's name refers to the toy that spins and does NOT imply a top in stock price. Spinning tops indicate indecision and when they occur at price extremes, they could portend a reversal. Chartists love them because they do, in fact, mark turning points more often than not. However, the most prudent action here is to await further proof.

Disclosure: Long NEM Calls, Long SLW


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