CDE: When The Levee Breaks

11/06/12 09:39:26 AM

by Donald W. Pendergast, Jr.

As anticipated, the smart money -- in one of the most volatile precious metals mining stocks of all -- finally made their move on Election Day.

Security: CDE
Position: N/A

A few Traders.com Advantage (TCA) articles ago, I made the case that shares of Coeur d'Alene Mining Corp. (CDE) had a high probability of reversing lower, heading down to a key 40-day cycle low between 27.50 and 22.50 by November 17, 2012. This forecast was made using money flow analysis, support/resistance confirmation, and price cycle studies along with a few other technical odds and ends.

Today was one of those times when the power of those various technical dynamics and forecasts all came together in breathtaking fashion. CDE opened sharply lower on Tuesday morning (at 28.80), down more than 5% from Monday's close of 30.37, decimating a key bullish trendline (at the 29.80 level) as news of its negative earnings propelled this stock lower.

But news of its $16 million third-quarter loss was just the opening act for the CDE horror show on this important day. Here's a closer look now at this powerful bearish reversal along with a look at the likely near-term price action in this key precious metals mining stock. See Figure 1.

FIGURE 1: CDE, DAILY. Seven weeks of gains in CDE were decimated in a single trading session on Tuesday, November 6, 2012. According to various price cycle studies, CDE remains on track to test cycle low support at 22.50 by November 17, 2012.

Graphic provided by: TradeStation.

Most experienced technicians and chart readers know that proportional pullbacks and/or major trend reversals are a regular occurrence in stocks that make sustained, large-gain trend moves. For such market observers, the idea of CDE pulling back by 38% or even 50% after making a 100%-plus gain between late July and early November 2012 probably wouldn't even raise an eyebrow; after all, the stock's uptrend has been steadily losing upward momentum since mid-September 2012 and was also staring at a very strong level of overhead resistance at 31.00 and selloff or pullback was growing more likely every day.

Cycle studies also made a strong case for a minor rise above 31.00, followed by a substantial correction into the mid- to upper $20 range by mid-November 2012. But it's not very likely that anyone could have anticipated Coeur's multimillion-dollar third-quarter loss, break of a two-month-old bullish trendline, and plunge from Monday's close of 30.37 down to 23.97 (as this is being written), all on the same trading day. See Figure 2.

CDE has already taken out a key Fibonacci confluence support zone near 25.50 and is already trading well into the general price target range of its anticipated 40-day cycle low target range of 22.50 to 27.50. There is another strong Fibonacci support level in the 21.50 to 21.75 area, but it is unlikely that CDE will actually hit that level before making a (minor) tradable bounce higher from the 22.50 to 23.00 area.

CDE's price may have changed in the twinkling of an eye, but there was plenty of technical evidence to suggest that a trend reversal was on the way, especially over the past month of trading action.

FIGURE 2: CDE. Coeur d'Alene shares suffer a major blow after the company reported third-quarter losses of nearly $16 million on Tuesday, November 6, 2012.

Graphic provided by: TradeStation.

If there are lessons to be learned here for traders and investors, these would be the three most important ones:

1. Long-running bullish trends will usually give at least some advance warning before a shock selloff and/or trend reversal occurs. Money flow divergence with price, cycle studies, Elliott wave analysis, relative strength measures, support resistance, and price patterns can all be used in concert to help warn market players in advance of a major turn in a stock.

2. Price cycles can shorten or lengthen without warning and might just decide to bottom out a week or two before anticipated. Never make an investment or trading decision solely on cycle analysis without using a variety of other technical tools as well.

3. Earnings matter! In fact, some very smart market analysts believe that changes in earnings growth rates are among the most potent of all factors that help determine a stock's near-term trend. Pay attention to the earnings reports and release dates in the stocks you regularly trade!

4. Like the adage goes, "An ounce of prevention is worth a pound of cure." If existing longs in CDE had adequate protective put option protection (or even a good till canceled stop-loss in place) by the close of trading on Monday, they would likely have been spared a good amount of the equity account damage that today's plunge has caused. Think ahead, and if the long stock position you're holding is up by 20%, 30%, 50%, or even 100%, invest a little of your open profits in some wisely selected put options that can help keep you in the game instead of carted off as yet another casualty of the stock market wars.

Think about these four observations and how they may help keep your own trading account out of trouble in the months and years ahead, no matter who wins the White House today. Trade wisely until we meet here again.

Donald W. Pendergast, Jr.

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

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CDE: When The Levee Breaks

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