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GFI : Bullish Reversal In The Making?

03/27/13 04:23:34 PM
by Donald W. Pendergast, Jr.

Down by more than 60% since July 2011, shares of Gold Fields Ltd. may be in the process of preparing for a bullish turnaround.

Security:   GFI
Position:   N/A

Only two years ago, shares of Gold Fields, Ltd. (GFI) were on a gigantic bullish tear - one that finally reached its apex in April 2011 after a rewarding 18-month rally that commenced in late 2009. Since the spring of 2011, however, the stock has steadily sought ever lower valuation levels, dropping by nearly 62% in a 23-month period. But every long downtrend eventually ends and there are a couple of important technical clues that are now suggesting that GFI may be much closer to the end of its decline than it is to its beginning. Here's a closer look now.

Figure 1. While GFI's latest bearish gap looks like an omen of doom for the beleaguered gold miner's share price, a closer look at the stock's momentum and money flow trends paints a more hopeful image.
Graphic provided by: TradeStation.
The large bearish gap that manifested on GFI's daily chart (Figure 1) on February 21, 2013 came as a shock to traders and investors who had been monitoring the stock's nine-month long sideways-to-down trading range; GFI dropped by more than 16% in just one day (previous close to next day's open) and so it wasn't surprising to see the stock sell off even more in the days that followed. During that further slide, the stock was hugging the lower red Keltner band (set at 9.5 standard deviations away from a 50-day simple moving average), suggesting that even more downside was possible. However, by the middle of March 2013 GFI slowed its rate of descent, closing inside of the lower band despite eventually dropping to as low as 7.64 on March 26, 2013. As GFI was gradually losing downard momentum, its 34-day Chaikin Money flow histogram (CMF(34)) began displaying a bullish price/money flow divergence; taken together, the close inside the band and the bullish divergence are indicating that GFI may be getting ripe for a bullish turnaround. This bullish case is made more likely by the minor double bottom pattern (markers 1 and 2 on chart) that recently formed.

Another possible clue that a reversal higher is near is that the late February 2013 gap may actually have been of the exhaustion variety rather than that of a breakaway or continuation version.

Figure 2. The precious metals mining group has been heavily sold off for the last few months; look through each ticker's daily chart to see if you can spot other reversal setups in the making - just as in GFI's case.
Graphic provided by: TradeStation.
Graphic provided by: TradeStation Radar Screen.
Now of course it's all well and good to be able to identify a stock that may be approaching a bullish reversal point, but how do you know when it is safe (or relatively safe) to enter a new long position, anyway? Well, one thing to look for is to see if GFI can soon sail above the previous swing high of 8.27; this will be one of the first confirmations that the turn is for real, and that new money is steadily pouring into the stock. As for triggering an actual long entry, you could use something as simple as a 10- or 20-day channel breakout or the crossing of the 18-day exponential moving average (EMA) by the nine-day EMA or even just a cross above GFI's nine-day EMA as your long entry trigger. And if you see most of the other gold/silver mining stocks making similar bullish crossovers, then you're going to have the added benefit of industry group confirmation also working on behalf of a successful GFI long entry.

Skilled option traders might also want to investigate the sale of near-term, out-of-the money puts in this stock; the May '13 GFI $7 puts are selling for about .15 as this is written; the put's strike price is 10% below GFI's current price, giving a bit of leeway for effective trade management. If you sell the put and its value falls by 50% to 60%, buy it back for a nice profit and if you see GFI make a daily close below 7.50, buy it back for a small loss and wait for a better opportunity. As this is a reversal-style trade, try not to risk more than 1% of your account value on this trade, no matter if you trade it with long stock or a short put. 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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