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CYCLES


Hecla Mining Has More Gains Possible

04/28/09 11:59:35 AM
by Donald W. Pendergast, Jr.

Hecla Mining, despite recent sales growth and earnings woes, has just completed a daily cycle low, rising after a successful test of support.

Security:   HL
Position:   Buy

Hecla Mining (HL), one of the "old line" precious metals mining companies, produced more than eight million ounces of silver in 2008 at a cost of approximately $4.20 per ounce. Long term, the earnings growth and sales trend look very favorable, and the ongoing secular bull markets for gold and silver could mean plenty of fat and happy years ahead for this Idaho-based miner. Fundamentals aside, the best place to start when considering the stock of any company is its price chart. Let's review HL's daily price action for the past few months and see if the stock's current price trend is likely to remain strong. See Figure 1.

FIGURE 1: HL, DAILY. When a stock makes a daily price cycle low and then turns higher in the wake of a successful support test, the line of least resistance is usually higher, especially if its money flow trend is bullish.
Graphic provided by: MetaStock.
 
Hecla shares have doubled since the start of the March-April 2009 rally and are currently near the lower half of a very large broadening wedge formation. Money flow (as depicted by the Chaikin money flow (CMF) (34) indicator) is excellent, moving right in sync with the upward price trend in the stock. Even more interesting is the upturn in the stochRSI indicator, a turn that appears to jive well with the normal 17-20 bar (swing low to swing low basis) daily price cycle in HL shares. Note how the 50-day exponential moving average (EMA) also acted as a strong support level (four times) as the broadening wedge began to take shape.

There is an average risk daily-based trade setup here, but we need to go over some of the particulars first.


HL's daily chart shows that there are three relevant overhead resistance levels that might be of importance to traders going long here; the first lies at $2.49 (the prior swing high), the second resides at approximately $2.70 (based on the red upper channel line of the wedge formation), and the last one exists at $2.80, which is the January 30, 2009, swing high. Meanwhile, strong support resides near the $1.90-2.00 zone.

Here's one possible way to play HL's latest cyclical rise:

Buy half a position at a price less than Friday, April 24's high, using a 15- to 30-minute chart to time a pullback entry. The stochRSI could be employed to help time this kind of intraday entry, too; just make sure that price has bottomed intraday and that the stochRSI has a confirmed close above its signal line, just as the daily stochRSI on the daily chart has done. Now, once that entry has been made, wait for Friday's high at $2.35 to be taken out, going long with the second half of the position on a buy-stop set near $2.36. The initial stop can be placed one tick below the daily cycle low near $2.00.

Profit-taking might be handled in this way; if $2.50 is reached, take off a third of the position, and start trailing the move higher with a three-bar trailing stop of the lows. If the $2.70 level is approached, take off another third of the original full position and make sure the stop has been moved to at least breakeven. Consider letting the final third of the position run, being aware that the $2.80 resistance could also act to turn prices back lower. If $2.80 is taken out, the next resistance is $2.95, so consider switching to a two-bar trail of the lows instead in an attempt to lock in more of the potential profits.

Will this proposed trade setup play out as described? There's just no way to know in advance, but given the current technical posture of the stock, the odds favor at least a partial move in the direction of that upper red channel line.

Wise trade management will make all of the difference with this trade setup, so do a little homework first, deciding beforehand how you'll play any intraday pullback move or subsequent buy-stop entry. Try not to risk more than 1-2% of your total account equity either, just in case HL decides to head back south in a hurry. When it comes to volatile stocks like those composing the gold/silver mining indexes, almost anything can (and usually does) happen, typically when you least expect it.



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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