Thursday, September 20, 2012

Breakout Stock Could Make You 38% Before Hitting Resistance: AU

Quantitative easing has historically been good for stocks, bonds and gold. And given that the Federal Reserve's latest QE program is open-ended, we might see the benefits of easy monetary policy in the markets for some time.

While buying when the Fed eases has been profitable in the past, it still pays to be selective and try to buy stocks that have value, earnings growth and a chart pattern that supports higher prices. The hunt for that kind of stock led me to the gold miners where a large-cap bargain is trading at a reasonable valuation, has excellent long-term earnings prospects, and a chart that points to much higher prices.

Gold is a volatile market to trade, and the price of the metal looks like it has reached a critical level. It could break out to new all-time highs, but first it needs to close above significant resistance levels. There are ways to trade prices that are at inflection points, but there are also safer ways to trade the gold market.

Mining stocks are a leveraged bet on gold prices that can offer gains greater than the metal would in a bull market, and undervalued mining stocks could deliver gains even in a gold bear market. That makes a trade in this mining stock low risk since it could provide gains no matter what gold does.

Miners are called leveraged metal trades because their cost of production is relatively fixed, so increased market prices can lead directly to greater profits. This company reported a cost of production of $801 an ounce and expects to continue mining more than 4 million ounces a year at a cost of $780 to $805 an ounce over the next year. Gold trades for more than $1,700 an ounce, and even the most bearish forecasts call for prices of more than $1,100 an ounce. At $800 an ounce, profitability is virtually guaranteed.

That could explain why fundamental analysts are excited about AngloGold Ashanti (NYSE: AU). Their average one-year price target for the stock is $53.02, about 46% above the recent price. At the target price, AU would be trading at a price-to-earnings (P/E) ratio of about 12 based on next year's estimated earnings, a reasonable valuation for any company. And that price is also near targets derived from technical analysis.

AU Chart

AU appears to have formed a triple-bottom and looks like it is ready to move higher now. Resistance at $50 looks like it could be significant, but that leaves room for a potential gain of almost 40%. Risk can be managed with a stop at $34.45 where AU would fall back into the trading range that preceded the breakout. Falling back to that price would indicate that the breakout has failed.

Although AU can make money mining gold at a cost of about $800 an ounce, the industry leaders are able to pull gold out of their mines for less than $350 an ounce. Cost cutting, which certainly seems possible for this company, could lead to even bigger profits at AU. Potential savings could be the reason that analysts are expecting annual earnings growth to average 65% a year for the next five years.

The stock is currently priced at about 9.3 times earnings over the past 12 months, a P/E ratio that is below average for this stock market. The company has been spending aggressively on new mines and increased capacity. Analysts underestimated the impact this spending would have on earnings, and the company has missed their earnings estimates twice in the past four quarters. However, that spending is expected to result in increased production later this year, and lower capital spending should help AU deliver steadier earnings.

With steady earnings, AU could become a favorite among value investors and deliver gains to traders buying now.

Recommended Trade Setup:

-- Buy AU at the market price
-- Set stop-loss at $34.45
-- Set initial price target at $50 for a potential 38% gain in 6-12 months

Follow These Technical “Crossovers” to Profits

Technical analysis has become so commonplace that even though fundamental analysts may dismiss it, they still follow the most widely accepted technical analysis measures, because they know everyone else is doing so.

Two such widely used measures that technical analysis has uncovered can help investors maximize their returns and/or reduce their losses.

The simple moving average in technical analysis measures the average price of a particular stock or market over a period of time. A five-day simple moving average is calculated by taking the closing price of a stock or market for five consecutive days, adding them together, and dividing by five, to achieve the average price during that period or, in technical analysis terms, the five-day simple moving average.

The most important and most used simple moving averages are the 50-day and the 200-day moving averages. The 50-day simple moving average in technical analysis captures the medium-term trend of a market or stock. The rule is that, as long as the price of the stock on the technical chart trades above the 50-day moving average, the stock is said to be trending higher or in an uptrend in the medium term.

The long-term uptrend or downtrend can be defined by the 200-day simple moving average. As defined by technical analysis, a stock that trades below the 200-day moving average is said to be in a bear market. Conversely, a stock that trades above the 200-day moving average is said to be in a bull market. For this reason, the 200-day simple moving average is a very important indicator for a market or stock, according to technical analysis.

One of the most watched technical indicators on a technical chart is the crossover. When the 50-day simple moving average crosses above the 200-day moving average on the technical chart, this is bullish for the stock or market being followed. This is known as the “golden cross” in technical analysis because the medium-term indicator has gained more momentum than the longer-term indicator, which means the stock price has momentum behind it to make it rise.

When the 50-day moving average crosses below the 200-day moving average on the technical chart, this is bearish for the stock or market being followed. This is known as the “death cross” in technical analysis, because the medium-term indicator is losing more momentum than the longer-term indicator, which means the stock price is set to fall.

As always with technical analysis, a visual example via a technical chart is the best way to illustrate the theory.

Oracle Corporations Stock Analysis Chart

Chart courtesy of

The above is a technical chart of Oracle Corporation (NASDAQ/ORCL) from 2010. Notice point number three, where the 50-day moving average (green line) crosses below the 200-day moving average (red line). Right after this death cross, the stock price of Oracle traded lower.

Now take point number four on the above technical chart. Here the 50-day moving average crosses above the 200-day moving average, which is known as the golden cross, signaling bullish momentum. Notice how the stock of Oracle continued to trade higher after the bullish crossover.

The golden cross and death cross are useful technical indicators that can help an investor know when to buy and/or sell a stock or market. They are common yet powerful tools in technical analysis that investors should be familiar with and use.

McAlvany Weekly Commentary

QE to Infinity

About This Week’s Show:
- QE is a fancy word for money printing
- Even in inflation not all commodities rise
- Economist Taylor gives dire warning in Wall Street Journal

David Morgan: Silver Moving Towards Par With Gold!

With gold and silver continuing their strong advances in the wake of the Fed’s QE∞ announcement last Thursday, The Doc sat down with silver expert David Morgan for an EXCLUSIVE INTERVIEW regarding gold and silver’s fundamentals and where Morgan sees the metals heading over the next 12 months.

Morgan believes the big gains seen in the metals over the past month was the market pricing in QE3, but believes particularly silver has much room to run, stating that the metal will most certainly double from here, and will most likely triple from here. Morgan believes silver’s nominal high near $50 will be broken to the upside in 2013, with silver likely reaching $60-$75/oz over the next 12-15 months.

Morgan also discusses the current supply side for silver and the massive physical tightness in the market, potential BIG, BIG problems for Barrick if it’s Pascua Lama mine fails to reach production (anticipated to produce up to 40 million oz annually).

The market’s premier silver analyst concludes by discussing his expectations for silver to massively out-perform gold going forward, and states that he expects the silver/gold ratio to narrow to at least 10 to 1, and states that silver is moving towards par with gold!

We See $88 As The Next Key Level For Crude Oil Futures

Next Key Downside Level for Crude Oil - Commodities Comment
As the US Existing Home Sales release this morning showed sales climbing to a 2 year high, we note that most major markets (SP 500, US bonds, Gold) are still very quiet as the market digests Bernanke’s QE pledge and also gets prepared for the homestretch of the US presidential election. We anticipate low volatility for the US stock and bond markets going into the election. We notice that precious metals (gold, silver) are staying strong, and consolidating near multi-month highs. We would not at all be surprised to see these metals markets consolidate into the presidential election as well.

However, one market stands out today as the big mover – Crude Oil futures. DEC 12 Crude oil futures are the biggest loser in the commodities complex today. We include a chart to share with you some key trendlines and price levels.  In a previous report we issued, we commented that we thought crude oil would touch $100, which it recently did.  Now, we note that crude oil has broken a key multi-month supportive trendline and is now approaching the next major chart support at $88. This is an important price level in our view. If Crude oil can’t stay above the $94 area, we look for $88 to be hit.

To us, it feels and looks like most markets are consolidating and are waiting to see how some major issues develop before making their next move – Europe, US economic data, and the US election.  We believe the SP 500 remains in bull mode and that crude oil might hit its key downside target of $88 shortly as traders prepare for a possible political release of oil reserves by the US.
For commodities investing and trading support (managed futures and options account, commodities mobile trade alerts, and self-directed account set-up, contact Lido Isle Advisors at 949-461-1137

Weatherford International Ltd (NYSE: WFT)

Weatherford International Ltd. provides equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells worldwide. It offers artificial lift systems, which include reciprocating rod lift systems, progressing cavity pumps, gas lift systems, hydraulic lift systems, plunger lift systems, hybrid lift systems, wellhead systems, and multiphase metering systems. The company also provides drilling services, including directional drilling, secure drilling services, well testing, drilling-with-casing and drilling-with-liner systems, and surface logging systems. In addition, it designs and manufactures drilling jars, under reamers, rotating control devices, and other pressure-control equipment used in drilling oil and natural gas wells; and offers a selection of in-house or third-party manufactured equipment for the drilling, completion, and work over of oil and natural gas wells for operators and drilling contractors, as well as a line of completion tools and sand screens. Further, the company provides wireline and evaluation services, as well as well abandonment and wellbore cleaning services; stimulation and chemicals, including fracturing and coiled tubing technologies, cement services, chemical systems, and drilling fluids.

To review Weatherford's stock, please take a look at the 1-year chart of WFT (Weatherford International Ltd.) below with my added notations:

1-year chart of WFT (Weatherford International Ltd.)

WFT had been trading within a sideways Rectangle for the last (3) months. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. What's great about a Rectangle pattern is that it not only provides you with trading points of support & resistance, but it also gives clearly defined breakout & breakdown points. The Rectangle pattern on WFT formed a $13 resistance (blue), which was also previous support, and an $11.50 support (lt. blue). Late last week the stock broke through the resistance.

Why the latest row between China and Japan is a nightmare for the tech industry

The Senkaku Islands: not much of a holiday destination (Photo: AP)

The mines at Baotao have slowed production in the light of the Diaoyou situation; they provide around 99 per cent of the world’s supply of rare earths.

In Baotao, inner Mongolia, a huge mine operates day and night. Workers in chemical suits hose acid into tunnels. Huge posters bearing images of smiling employees proclaim “Become the leader in Rare Earth mining!” as huge refineries and factories belch smoke into the sky. Yet this huge centrally planned project is in danger because of events thousands of miles away.

You probably haven’t heard of the Senkaku islands. Or, as they are known in China, the Diaoyou islands. Called the Pinnacle islands on British naval charts, they are a collection of uninhabited, barren rocks, home to a rare albatross and a exceptionally rare type of mole. Not a great holiday destination.

Last week, Japan arranged to buy the Senkaku islands from their private owners. There was uproar in China. In Beijing, cars were burned and Japanese businesses were attacked, and riots in Shenzen. The Senkaku/Diaoyou dispute has long been a flashpoint between the two nations. Every few years, ultra-nationalists from either side (or, indeed,from Taiwan, who also claim them) will sail out there, raise a flag, and cause a row.

However, it’s never been this serious before. Regardless of silly orientalist ideas about “losing face”, a quick glance at a map reveals why the governments care about these rocks. The islands are mid-way between Japan and Taiwan; a Chinese base there would push the range of carrier-killing ballistic missiles an extra four or five hundred miles into the Pacific.


Chart of the Day - Cyberonics (CYBX)

The "Chart of the Day" is Cyberonics (CYBX), which showed up on Tuesday's Barchart "All-Time High" list. Cyberonics on Tuesday rallied to a new all-time high of $52.49 and closed +2.62%. TrendSpotter has been long since Aug 17 at $45.07. In recent news on the stock, Piper Jaffray on Aug 29 reiterated its Overweight rating and raised its target to $52 from $44. Canaccord on Aug 29 upgraded Cyberonics to Buy from Hold and raised its target to $56 from $34. Cyberonics on Aug 28 reported fiscal Q1 EPS of 38 cents, above the analyst consensus of 36 cents. Cyberonics, with a market cap of $1.3 billion, develops and sells medical devices.