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Cameco Offers A Convincing Breakout

04/27/09 12:29:46 PM
by Donald W. Pendergast, Jr.

Cameco Corp., one of the uranium industry's hottest growth stories from 2002 to 2007, has just made a bullish break from a five-week-old basing pattern.

Security:   CCJ
Position:   Buy

Canada-based Cameco Corp. (CCJ) is the largest uranium miner in the world. It's a company that's seen its share of good times and bad; its common stock rose dramatically from 2002 to 2007 before falling sharply during 2008 (about 80% from its all-time high) as the global uranium and general commodity boom took a rest. The company also had to deal with a major flood in one of its Canadian mines, a situation that put major pressure on its share price. Today, the company appears to be on a steady path to recovery as the global demand for uranium continues to grow. Even better, CCJ just flashed a major buy signal, one that should get the attention of breakout and momentum traders everywhere. See Figure 1.

FIGURE 1: CCJ, DAILY. The combination of a sustained uptrend, heavy money flow, powerful momentum, and a high-volume, wide-range breakout from a substantial basing pattern all combine to suggest that more gains are still possible for Cameco.
Graphic provided by: MetaStock.
Graphic provided by: Rahul Mohindar oscillator (RMO) from MetaStock v 1.
Recent readers of my articles here in Advantage may have noticed that I've been posting a steady stream of articles that deal with a common market theme -- bullish breakouts from basing/consolidation patterns. They are occurring in a variety of stocks from various industry groups, and these trade setups appear to be a precursor to more gains by the broad market indexes in the weeks to come. One of the most pronounced of these bullish breakout patterns appears here. CCJ has just launched higher from a five-week basing/consolidation pattern that appears to have just about everything going for it, both on a technical and a fundamental basis. For starters, let's examine the long-term up trendline; it's now rooted by three separate swing lows and should offer some measure of support during future pullbacks. The Chaikin money flow indicator at the bottom of the chart (CMF) (34) is extremely strong, as is the Rahul Mohindar oscillator (RMO) at the top of the graph.

Before breaking higher, CCJ completed a successful test of support near the 50-day exponential moving average (EMA) before blasting right through that formidable $18.75 resistance level with today's wide-range, high-volume daily bar. CCJ also boasts higher than average relative strength versus all of the major US broad market indexes, another plus in its technical strength column.

Trading CCJ here looks like an exciting and potentially profitable prospect, but some care must be exercised before diving headlong into such a breakout setup. Stock traders would do well to wait for at least an intraday pullback on a 20- to 30-minute chart before putting on any positions. After such a break higher, some nervous longs are likely to sell into such strength, looking to lock in some profits. Patient traders can be the beneficiaries of such liquidation, perhaps able to acquire CCJ at a bit of a discount. Putting half a position on a 30-minute pullback/reversal higher would appear to make a lot of sense here; if a good initial entry price can be secured in that way, it will make it much easier (emotionally) to put on the remaining half on a breakout above today's (April 23rd) high at $19.85. For all trades, an initial stop should be placed near $17.19, the April 22nd low.

The next overhead resistance lies near $21, so half profits might be taken if that price zone is reached, with the stop brought up to breakeven at that point. Trailing the move with a three-bar trailing stop of the lows also seems to be a good move, too.

Traders with a longer-term bullish bias might consider the same basic entry strategy, but then employ a 2 * ATR 10 (or a 2.5 * ATR 10) volatility trailing-stop instead, in the hope of extracting a much larger amount of profit from any extended trending move in CCJ. Either way, whether you're just looking for the potential for some quick smash 'n grab profits or are more interested in latching on to a possible trend-following move, this CCJ breakout setup looks like it offers the best of all worlds to traders of every persuasion.

Finally, option traders might consider putting on a June $20 covered-call play; if the stock is called away (remember, you need to already own or acquire 100 shares of CCJ in order to make this covered-call trade happen) at expiration (56 days), the play stands to earn about 42% on an annualized basis (based on today's $19.66 closing price and June $20 call option premium of $1.30). Similar to the previously outlined trade management guidelines, this particular CCJ trade should be closed out for a modest loss if either the April 22nd low or the volatility trailing-stop of your choice (either a 2 * ATR 10 or a 2.5 * ATR 10 version) is taken out on a daily close.

Here's another factor to consider when deciding which kind of CCJ trade you want to employ. That five-week old consolidation pattern could also be characterized as a rather large flag and, given its placement here on the daily chart, the pattern might imply a potential upper price target for this breakout move of approximately $24-25.

Holding out for such price levels would require the use of either of the two volatility trailing-stops mentioned earlier and should make the job of holding onto the stock much easier if the anticipated trend move takes longer than expected.

Over the years, the energy sector has always offered traders and investors plenty of opportunity. Now, as the global renaissance in nuclear power begins to transform the way we make electricity, stocks like CCJ could be some of the most interesting and potentially profitable to trade and invest in.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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