$5 Gold Stock Ready to Resume its Bull Run
The employment report for May was the worst in five years, with the number of jobs created falling to just 38,000, well below expectations. Not surprisingly, the U.S. dollar fell sharply, and thanks in part to its inverse relationship with the greenback, gold soared.
Technically, it was an important move for the yellow metal.
After floundering for several months following a February breakout, it appeared gold bugs were losing control. However, the June 3 rally in gold lifted it off support and negated what could have been interpreted as a double-top pattern. In other words, the bulls resumed control and the rising trend that had been in place since January was back in gear.
Gold stocks look even better than the metal, and many consider that to be bullish for both.
#-ad_banner-#Since bottoming in January, the widely followed PHLX Gold and Silver Sector Index (XAU) and most sector ETFs have significantly outperformed the broader market. Indeed, it has been quite some time since this was the case as the sector has endured a long bear market.
What I find most interesting and encouraging is that volume kicked up several notches following the bottom. For example, the VanEck Vectors Gold Miners ETF (NYSE: GDX) traded about 40 million shares a day in early 2015, but as it was forming its bottom in the latter half of the year, it traded around 60 million. Once it got moving to the upside this year, daily volume jumped to 90 million shares.
That tells us the rally drew in buyers in a big way. It also suggests that true demand is back and the trend is very likely to continue higher.
The same is true for many individual gold stocks, such as today’s pick, Kinross Gold (NYSE: KGC). As we can see in the chart below, the difference in average volume before and after the January bottom is like night and day.
The rally ran into resistance in April and fell back in what looks to be a well-defined flag pattern. The pullback was a nearly perfect Fibonacci 38.2% retracement of the rally.
Because the stock is priced in single digits, I did not want to lead with the absolute percentage gain and pullback. Volatility is quite high, and with a pullback measuring nearly 30%, this might not be a stock for everyone.
Be that as it may, the chart pattern is crisp and last week’s breakout following the May jobs report was clear. And as the late night TV pitchman would say, “But wait, there’s more!”
The flag pattern settled on the 50-day moving average before bouncing. That confirmed the rising trend.
And on-balance volume, which keeps a running tab of volume traded on up days minus down days, hit a new two-year high despite the fact that prices pulled back so much. This is a good sign that bulls are more aggressive than bears and money is flowing into the stock at a good clip.
All told, the chart looks pretty to me and worthy of consideration as the stock attempts to get back to its recent high.
Again, given the low price and high volatility of KGC, wider stops and smaller position sizes than normal are warranted to reduce risk.
Recommended Trade Setup:
— Buy KGC at the market price
— Set stop-loss at $4.85
— Set initial price target at $6.50 for a potential 25% gain in three weeks
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