zak mir on “where angels (and SBM’s former editor) fear to tread” – AVM & precious metals

By
3 mins. to read

As I have stated on quite a few occasions over recent months, echoing the words of wisdom of the perhaps the greatest Scotsman alive today – Hugh Hendry, being too early to a party is just as bad as being too late. I am sure that bulls of Avocet Mining (AVM) have been painfully aware of this on several occasions during the past 12 months when it had appeared the floor had been reached in the stock only for a fresh leg to the downside to appear.

One of the best example of a false dawn here came in the second half of last month with the break above 10p – a break which was also a bear trap rebound from below initial June support. However, as one would expect with a stock which has put so much energy into ensuring bargain-hunting fails, until yesterday, there was a slow slide back towards the 50 day moving average at 8.8p from a 12.4p peak. This seemed designed  to ensure that anyone thinking that the stock was a slam dunk recovery situation would have to look deep into their soul and bank balance in order to find the motivation to remain in position.

However, today’s price action with the unfilled gap to the upside in the wake of a narrow bear trap below the 50 day line on Wednesday looks like it will be enough to render this rebound “bombproof”. If you add in the way that the August low to date at 8p was well above the initial July resistance 7.7p, the position here appears even more solid.

Nevertheless, the highlight of the latest price action at Avocet Mining is the way that the post-June formation on the daily chart is one of the strongest formations around: the cup and handle reversal. The rebound today mapped out the right side of the formation and it can be said, at least while there is no end of day close back below the gap at 9.5p, that a modest target for the end of August would be the 2013 resistance line at 15p.

Of course, the relationship between mining stocks and the actual metals prices is an esoteric one. This is partly due to an impression that the underlying physical market is led by its equities. I am reminded of this given the way that in 2011 mining stocks fell well before the peak came in gold itself. The current position in gold may have some traders willing to back the upside. The clearly narrowing range between the red April resistance line and black June support line of just $20 means that things are coming to head for this market and should be resolved soon.

The fact that the RSI oscillator has ticked above neutral 50 to stand at 51 is clearly a positive factor-and a leading indicator to any upside breakout. For this to happen we would be looking for an end of day close above the red April resistance line at $1320, also the area of the 50 moving average.

While this looks and feels like a done deal, it has to be said that the main July breakout through $1300 could have been tagged in the same way a few weeks back. Really, we would want to see a higher high above last month’s resistance at $1348, before being able to justify a singing victory for a recovery towards the key $1,400 level and beyond late this month. This month’s bear trap floor at $1,273 is the present logical stop loss for the bull argument, although the June uptrend line breaking at $1,285 would also be an early warning on a relapse.

Finally, although gold is the most high profile of the precious metals brigade it does look as though Silver might actually make something of a splash during August if the present charting setup pans out as expected. Indeed, the metal appears to be in what I call a cage, a narrow, extended range which normally leads to a sharp move – either way. In this instance it seems to be correct to back the buy side on the basis that since the middle of last month we have been treated to a narrow double bear trap rebound from below $19.27, as well as a RSI trendline break through neutral 50, with the current reading 54. The view now is that while there is no end of day close back below the 20 day moving average at $19.82 the upside here should be towards the early June resistance through $22.50.

Comments (0)

Comments are closed.

YOUR FREE INVESTMENT MAG

Get real investment insights from some of the best minds in the business - with our free Master Investor Magazine.