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GSS Top Relative Strength Among Gold Miners

10/12/12 01:08:38 PM
by Donald W. Pendergast, Jr.

Of the 18 precious metals mining stocks that are outperforming their parent ETF over the past four weeks, none are stronger than shares of Golden Star Resources.

Security:   GSS
Position:   N/A

Golden Star Resources (GSS) shares have far outperformed its parent exchange traded fund (ETF) GDX (Market Vectors Gold Miners) over the past month, even though the shares themselves are now enmeshed in some sort of a trading range or consolidation pause before attempting another run higher. The longer-term technicals still look very bullish in the stock, but the big question for traders and investors is whether the super-wide range, scary price action in GSS on Monday was a very fast drop and test of support -- with a bullish continuation move to soon appear -- or was it a precursor to a more noticeable drop into 40- and 80-day cycle support in the lower 1.50 area. See Figures 1, 2, and 3 for a closer look.

FIGURE 1: GSS, DAILY. While the dip down to the upper price range of the anticipated 40-day cycle low resulted in a strong intraday rebound on Monday, October 8, 2012, it's still highly probable that GSS will decline further and test the lower half of its anticipated cycle low price range between now and late October 2012.
Graphic provided by: Sentient Trader.
GSS made a major multicycle low on May 22, 2012, finally bottoming out at $0.90 as eight consecutive price cycles (ranging from five days to 20 months in length) all exhausted their downward trajectories together. The massive rise up to the high of 2.05 on September 21, 2012, equated to a gain of 128%, with profit takers causing the stock to go mostly sideways for the last three weeks. A pause or period of consolidation after such a strong rally is entirely normal, allowing shares to exchange hands as a new round of potential buyers get set to take a shot on the potential for yet another rally.

What is a bit abnormal, however, was the ultra wide range daily price bar on Monday, October 8, 2012, one that had a daily range of 23 cents -- nearly three times greater than the stock's 10-day average true range (ATR 10) figure of 0.084. The deep intraday dip actually brought GSS down to the very top of its 40-day cycle low price range (see green time/price/projection box), and in a hurry.

At first glance it seems like this could technically qualify as a legit 40-day cycle low, but since the decline was so violent and chaotic, it makes more sense to wait a few trading sessions to see if the stock quiets down and gives some more clues as to its next move.

Even if GSS does decide to move lower into the green zone, the stock's long-term money flow and strong relative strength attributes should cause it to have little difficulty in recruiting a new batch of profit-hungry gold bugs, traders eager to try and cash in on a possible continuation move in GSS into the red 40-day cycle high zone.

FIGURE 2: GSS. GSS has been outperforming its parent ETF (the Market Vectors Gold Miners) over the past four weeks.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
GSS is anticipated to bottom on its 40-and 80-day cycle between now and October 28, 2012, and is not projected to drop lower than 1.54 during that time window. If the stock catches another bid and breaks higher, the probabilities are good that GSS can launch into a new upswing, one that should peak no later than November 19, 2012, and at a price not greater than 2.88.

As far as playing GSS right here, right now, it's probably best to stand aside and see what the near-term action in the precious metals group looks like. GSS may soon bottom and fire a mechanical buy signal, or it may just go sideways to slightly lower before finally exhausting the profit-taking pressures altogether.

FIGURE 3: PRECIOUS METALS. Precious metals stocks get hammered during the morning session on October 8, 2012.
Graphic provided by: Interactive Brokers TWS Market Scanner.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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