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RESISTANCE LINE


EGO Hitting Major Resistance?

09/13/12 11:49:52 AM
by Donald W. Pendergast, Jr.

Shares of Eldorado Gold Corp. are up by nearly 50% over the last seven weeks but may now be hitting a major wall of resistance.

Security:   EGO
Position:   N/A

Eldorado Gold Corp. (EGO) common stock is one of the better trending components within its parent exchange traded fund (ETF), the Market Vectors Gold Miners (GDX). Up by better than 50% since late July 2012, the stock has been leading the rest of its gold mining brethren in terms of four-week relative strength vs. GDX but is now facing a major impediment to further upside as it meets up with strong chart and Fibonacci resistance in the 14.40 to 14.75 area. Here's a closer look now.

FIGURE 1: EGO, DAILY. Although the power of an uptrend that causes a stock to rise by 50% in seven weeks should never be discounted, the fact that EGO faces such strong resistance at a time of negative long-term money flows may be suggesting that a correction is due sooner rather than later.
Graphic provided by: MetaStock.
 
The large double-bottom pattern on EGO's daily chart (formed from the May 15 and July 23, 2012, swing lows) (Figure 1) helped lay the foundation for the recent seven-week-old rally in EGO, a stock that for many weeks has been outperforming the majority of its fellow gold miner component stocks held within GDX (Figure 2). As most traders and investors already know, precious metals mining stocks are some of the most emotionally driven equities in the entire stock market, and that they can and do trend (higher and lower) far beyond what their core fundamentals might fairly value them.

There may be some evidence of that occurring here on EGO's daily time frame, since its 100-day Chaikin money flow histogram (CMF(100)) is still in negative (bearish) territory and has been for the entire seven-week rally. True, the absolute level of the histogram is higher than it was at the rally's inception, but its current configuration is warning of a correction -- and probably sooner rather than later.

This bearish money flow situation becomes more meaningful as we witness the strong resistance area (pink horizontal line) that is formed by the April 2012 high of 14.72 and the combined Fibonacci retracements of swings AX and BX. Clearly, this is not the safest time to be piling into EGO (unless you have a big ego, of course!), as the risks of a correction are much greater than the potential for reward at this time.

FIGURE 2: GDX. The component stocks of the Market Vectors Gold Miners (GDX) ETF that are outperforming their parent ETF over the last four weeks.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
If EGO makes a pullback toward trendline support near 13.20 in an orderly fashion, that might be an excellent re-entry point for this stock, especially since its 20-, 40-, and 80-day cycles are all forecasting higher prices for EGO at various times between September 24 and November 25, 2012. If you do time a pullback entry in this stock, consider scaling into your position in thirds, thus cutting your risk dramatically while still allowing a good opportunity for profits.

EGO still has exceptional four-week relative strength vs. GDX and .HUI (the ARCA Gold Bugs index) and is also outperforming based on its 13-week relative strength too, so this gold miner should be given every benefit of the doubt before writing off its current trend as a fluke.

However, until its money flow trend turns bullish, it's much safer to wait for a correction to enter than to rush in now and possibly have your head handed to you by the market.



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: lineartradingsys@gmail.com

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