Leading Stocks Look Extended Consolidation Likely

by Olivier on October 5, 2010

Markets are pulling back. It remains to be seen if this is constructive action building pressure for a resumption of the uptrend after the recent run-up. For now most leaders and strong performers have moved up from sound bases and look extended at these levels. They simply don’t offer low-risk and high-probability entries at this point in time.

In the precious metals area the best proxies to watch are GDXJ – Market Vectors Junior Gold miners ETF , the ETF for Silver Miners SIL and SLW – Silver Wheaton. GDXJ is a great way to buy into aggressive gold juniors. As far as ‘extended’ is concerned, one metric to look at would be to measure a stock’s distance from its Moving Average 200. Looking at GDXJ this certainly looks like we are in for at least a few days of consolidation. One could also use the MA 30 for weekly charts in order to gauge exhaustion during a run-up. SLW’s weekly chart displays one of the greatest percentage moves away from its long-term moving averages since it started trading on the NYSE. We could witness a further run up in price, some sort of run-away move or even melt-up in price. I don’t think this is a high probability outcome at this point in time. Silver has just breached long term highs. Typical action would be to pause and retest those significant levels to build more pressure. Then a thrusting move resuming the uptrend could indeed lead to a buying frenzy and a melt-up in price.

Could I be wrong? Sure. I’ve been wrong before. My number one goal though is to find and stick to entries where I can control my risk. Emotional detachment is key. Typical setups I look for would be breakouts from sound bases with what I deem decent pattern pressure. If a stock is overextended and I have no place to set sound stop losses odds are not in my favour. In the long run, risk control and discipline are paramount, irregardless of the macro picture. Jumping the gun with extended stocks can be very costly. If one’s timing is ill-advised it can wreak havoc on your psyche. Always keep in mind to protect your mental capital.

Earnings season is setting up. The markets will show their hand soon. In the meantime I could still end up being stopped out of my remaining position in DNN – Denison Mines. On Friday the stock fared rather well. I’d like to see more strength though. If the DNN – Denison Mines Weekly Chart can break the 1.80 level I will consider adding to my position.

Probably a good time to reread my post on Greed and Trading.

There’s no fever like gold fever.

My public list with all my charts can be viewed here:

Buenas noches!

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