KGC Flag breakout

Here's a trade I took today.
Gold has been looking great lately and consolidating after some major gains. There is a symmetrical triangle of sorts going on for the last 7 trading days or so. Will it break higher from here? Looked like it was going to today, but then it came back off the high. Check out the chart for gold here.

In any case, the gold stocks have been doing very well as is illustrated by the $XAU (the GDX for an ETF) or the $GOX here. It has broken through some long standing resistance from a big sideways range and even showed new support at last month's resistance level from which to move higher.

(Click image to see it larger.)


I chose to enter KGC today for a stock play as it looks to have broken a bull flag on top of a serious flag pole. Like most stocks in the gold group, it doesn't have a 3.25 F/E score. Honestly, this is more a technical trade than anything, but looking over the fundamentals, I'm still happy with it.

It has good sales and earnings growth in the last year. Very good earnings growth. The Estimates are a bit spotty, but all together acceptable for me. PEG using the 5 year annual growth estimate of 10% is about 3, which is way to high. But using this year's estimate of 47%, it is well under 2. Also, I like that the current P/E of 31 is well below the group P/E of 64. Finally, it has met or beat its estimates every one of the last five quarters and the analysts are mostly favoring the stock.

Long term view shows volume building steadily to a high volume month in September with a big bullish candle. October pushing higher so far and a very old level shows 20 as a likely resistance level and great target.


A slightly closer look at the weekly chart shows some stepping up through bases. Three weeks ago broke through resistance on high volume.



Finally, the daily chart shows a serious rally with the price of gold and a flag developing as gold consolidates too. Today's break may be premature, but it had a nice volume spike, so I took it.
The Flag pole is about $4 high which, tacked on to the upper line of the flag, gives a target of about $19.25. I bought at the end of the day at $15.68 sizing my position for a stop loss level of $14.25. This gives me a risk/reward ratio of 1/2.5. If I let it go to the 20 area shown on the long term chart, it is a bit better.



I will let the stop take me out to the down side. If and when it reaches the $19 area, I will consider whether to take 1/2 at 19.25 or go for all at 20 depending on market conditions and gold. If conditions warrant it, I will let it run and trail a stop.
It is possible for these targets to be reached before earnings come in on Nov. 7, but unlikely. I am prepared to hold over earnings.

GO GOLD!!!!

Sector run down

I'll use weekly charts here to run down some of the majors. Peter Reznicek, the shadow trader guy, mentioned recently in a video or in his daily show that candlestick patterns are much more powerful or reliable on bigger time frames. We've all seen plenty of daily hammers or bearish engulfings or whatever that were just steam rolled. While we have to always remember that they are merely another form of an indicator and therefore secondary to trend and support and resistance, it's very useful to size up weekly action with candles as they are stronger reads. This makes a lot of sense to me.
As I pointed out in the last post, Oil is moving down in a serious way and is more likely to continue a bit further than move meaningfully upward. The Oil index is actually still in a healthy uptrend the higher highs have been slightly less aggressive lately, but higher all the same. This week shows a potential hammer indicating a potential reversal. To play an ETF on this sector look to the XLE, one of the heaviest traded of ETFs.
(Click image to see it grow)


The oil services don't look quite so healthy. Long term trendline was breached months ago, but this is a clear break. You might also even call this something like a Head and Shoulders top, but it's not so clear. Tough to figure exactly where to place a neckline for a support break. Regardless, if you're looking for a bearish play on oil look to this sector or just play the OIH ETF.


The convergence of price swings in gold seems likely to bust out in one direction or another and from what I understand about the dollar, I'd think up would be more likely than down.

Gold stocks have formed a sideways channel for the latter part of 06. Intermediate down trend in place now, but there is likely support at 125. For a pure play on gold, look to GLD. For the gold stocks, GDX.


Biotech looks very impressive with a break above it's bull flag resistance. For Biotech ETFs, look at BBH and IBB, but check out their composition. Quite different. BBH is heavy in DNA. DNA had an big breakout above a channel of months sideways of sideways movement.



Broker Dealers are making even more money. Everybody loves the stock market right now.
Big bullish candle on a break above resistance to a new high. What's not to like? Not sure if there's a perfect tracking ETF, but XLF is close. Take a look at GS and LEH. Amazing stocks with ever new highs.

Transports seem to be making an effort, but the chart still has quite a bit of work to do to look attractive. Look to IYT to play this index.

The recovery in the homebuilders still looks healthy. That may change soon, but so far, so good. The chart is showing a potential hammer at the seemingly significant 700 level. I'm showing a much bigger time frame here to show the huge topping formation that looks like a pretty well defined head and shoulders pattern. It's height of about 250 pts. forecasted the downward move of around that distance that actually happened quite dramatically on the break of the neckline. XHB is the ETF to play this group with.

The Internet stocks are a touch worrisome in that they didn't have a strong week while the Nasdaq was super strong. But it has been a very strong rally from the inverted head and shoulder reversal pattern, so a bit of consolidation after it exceeded its projected target makes sense. In the last five weeks we have a seen a bearish engulfing pattern, a tombstone doji and two spinning tops. What does this mean? Nothing. We're moving sideways between support and resistance. Watch those two levels for the next move.

After almost two years of sideways action, Software has moved into higher territory and to my eye had a little pennant formation formed. This is a bullish continuation pattern and looks to have begun the next move higher this past week. 3 more points beyond 190 and we'll know for sure. You know what Software stock has been very strong in the last year?
ININ. - GRRRRRRRRR!!!!!!


The strength in the Nasdaq just wouldn't seem complete without some confirmation in the Semiconductors. The SOX index does seem to be working on breaking the long term down trending resistance line, but it won't feel like the job is truly done until 490 is successfully surmounted. SMH is the ETF to play on this group.



Banks ascending steadily in 2006, but looking at the two year period, it looks like an ascending wedge which is inclined to break do the downside. With the bearish engulfing of a shooting star in recent weeks, I'd expect some kind of pullback. For now, however, we've got support at 115 with a big bullish candle that broke above that level. A bounce there would be the most likely for the immediate short term.


Healthcare stocks have been very strong in the latter part of 2006. Starting off 2007 with a big bullish candle too. I have to play devil's advocate, though and draw in th same type of resistance line as on the previous chart. The difference is, this chart looks very likely to blow right through this wedge. It probably needs some healthy consolidation for much more meaningful gains, but it looks like it wants to keep going for now.


There's screwy data on this chart for Healthcare stocks, so it's tough to get up close with it. Generally a nice looking ascent over the last 3 to 4 years. Some minor topping action, though, at resistance for this very long term wedge. It's been very strong since July.
TWGP was one we talked about in a meeting months ago. It had a beautiful trend, but has since broken it and begun a intermediate down trend.



After a few months of consolidation, Retailers reported much stronger sales than expected in December and pushed the index above resistance into open territory. The argument is being made that the strong consumer showing will support the economy for a bullish year ahead. I wonder what percentage of the consumers out there are buying on credit? For a very strong chart, look at MA, Mastercard. With some nice volume pushing through resistance here, it's a buy.
To play the retailers, look at RTH.



So there's the broad stroked look at it. I hope you agree that looking at weekly charts can really simplify things. Of these charts, there are 7 either at or near all times highs. I'd say that's a very bullish sign for the market.
From here you can choose the sector you like best and drill down further for stocks ripe for the picking. There are plenty of sweet ones.
Happy Hunting

Whipsawed

Sigh......

Ladies and gentlemen, I would so much have liked to have the first trade I show on this blog be a winner. A Gigantic winner! But, alas, "The Cost of Doing Business" has been paid.
ININ opened lower today and quickly darted down well past my stop order at 18.55 and triggered a market sell at 18.52 at 9:32 AM before pushing right back up to close near the high of the day's range, though still down a touch below my designated support line of 19.13. Truthfully though, I'm of mixed emotion about it. If this support area holds, I'll be forced to consider getting back into the trade having already lost on it once. If it breaks down, I'll be glad to be out already. My loss was actually less than my designated risk allowance since I positioned a bit conservatively, rounding down in number of shares. It feels a lot like I got whipsawed out of a situation that is now destined to use this level as support from which to make the expected move higher. However, it's strangely liberating to be out of a stock that is acting skittish. Let's explore.
As we know, support and resistance levels are areas and not exact numbers. In fact, to call the support line at such an odd number like 19.13 is perhaps a bit silly to begin with. Speaking of silly, I had to laugh at myself for writing in the post about doing business "If not now, then maybe the moment for this stock to make its move is still just around the corner..." Hello!?!? Note to self: The stock just put in a high of a 300% gain for the past year.
In any case, the high volume day today gives a mixed message. Certainly that it closed lower and is potentially breaking support on high volume is a major red flag. But today's candle also is a gigantic Hammer. Instead of the support line I proposed, if we were to use the closing daily highs for the resistance line (18.37) of the recent triangle, the stock actually closed above that support line today. An up day tomorrow would both confirm new support there and do it with some added strength of the hammer to back it up. This would be an ideal entry for a patient investor that chose to pass on the breakout day and waited for a test of new support.


Will I re-enter? Doubtful. I'll remain open to the idea, but I'd want some real convincing. I'm not getting great feeling about the tech sector. The Nasdaq broke below its recent trend support and potential triangle. It hasn't formed a lower low yet, but it's certainly going sideways.

The $GSO Software Index is definitely moving sideways now. (ININ is a software company.)


And the mighty SOX seems to be sitting heavily on the 50 MA after faulty bounce and lower high. Not necessarily a good thing for the Nasdaq. Tomorrow is make or break.

Another noteworthy tidbit is the after market close news today that Interactive Intelligence CEO Sells Stock, but even with all the selling this guy did November, he still owns a huge number of shares. You can look that up in the "Insider Trading" link from the left column of the Corporate Snapshot page.

In other news, Gold has pulled back during December and today bounced off it's 50 and 200 MA. This seems quite significant and looks like a no brainer on the chart(lightning strike me now). I'd imagine all the gold traders out there are seeing the same thing.
Here's the GOX. (The XAU looks similar.)



I like AUY for a gold play. Here's the bounce off new support after a big volume breakout. Based on the height of that 8 month channel, I figure a target of 16 is reasonable.



That's all for today. Thanks for stopping in to read the blog.