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Kinross Gold Setting Up For More Gains?

11/29/12 09:40:06 AM
by Donald W. Pendergast, Jr.

Shares of Kinross Gold Corp. have been rising after making two successful tests of support during November, but is this rally destined to fail?

Security:   KGC
Position:   N/A

Already behind schedule in making its anticipated 40-day cycle high, shares of Kinross Gold Corp. (KGC) may be on the verge of peaking just before a substantial correction. This gold mining issue is volatile, equally able to make powerful trending moves as well as frustrating, violent shakeout/fakeout events, and it is important to learn these different phases in this stock.

Cyclical and money flow analysis suggests that KGC may actually be in the fakeout stage right now, luring in latecomer bulls just before its internal cyclical dynamics drag the stock lower into December 2012. Here's a closer look now.

FIGURE 1: KGC, DAILY. Although KGC is technically in a confirmed uptrend, weak medium-term money flows suggest that at least some of the smart money players in this stock are cashing in their gains.
Graphic provided by: Sentient Trader.
After making a significant multicycle low on August 9, 2012, KGC embarked upon a very nice bullish trend move that drove the stock higher by more than 48%. This powerful cyclical move was repeated in dozens of other gold mining stocks as well. After peaking at 11.20 on October 4, 2012, KGC retraced nearly 60% of those prior gains and is now in process of attempting another move up toward that recent high-water mark.

Just looking at Figure 1, all looks reasonably bullish, but KGC's 40-day cycle high is already overdue at a time when the medium-term money flow in the stock is looking rather bearish. This suggests that some of the shorter-term, swing trading smart money may already be in process of unloading their already profitable KGC holdings, more than willing to put them into the hands of latecomer bulls or long-term trend-followers who are expecting an encore performance of last summer's strong rally.

FIGURE 2: KGC RELATIVE STRENGTH. Among GDX component stocks, Kinross Gold Corp. (KGC) has the best four-week relative strength versus the .HUI.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
KGC may very well go on to surpass its October 2012 high of 11.20, but near term, the probabilities favor the stock moving lower to test its primary, cycles-based support level, the 73.3-day valid trendline (VTL). KGC tested this VTL twice so far in November 2012, and it would not be surprising to see it tested yet again, if not altogether breached, by the first week of December 2012.

Should this VTL breakdown occur, the current 40-day cycle forecast is calling for KGC to decline into a range between 7.78 to 9.08 sometime before December 26, 2012. A sharp correction like that might be viewed as a Christmas gift of sorts, as the opportunity to buy KGC somewhere in the low 8.00 range could prove to be profitable, seeing as how there is major support near 8.00 (the 22.1-week VTL). See Figure 2.

Those holding long swing positions in KGC should already be scaling out and/or running closer stops, just in case this forecast plays out as expected. Aggressive bears might wait to see if KGC makes a daily close below the upper VTL; that could be a great time to buy slightly in-the-money (ITM) put options with at least two to three months of time value.

Traders going this route need to have a well-defined plan, including rules on when to close the trade out at a profit (hint: if a long option doubles in price, by all means take profits) and when to close it out at a loss (if it declines in value by 50%, sell it immediately).

Risking 2% or less of your account equity on every trade is also a must, especially if you want to enjoy a long running trading career that can survive the often unexpected twists and turns that the stock and commodities markets can (and will) send your way. Trade wisely until we meet here again.

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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