Yamana Gold (AUY) — This low-cost producer in the gold mining sector has pretty poor fundamentals. But these days, bad financial performance is true of almost all the stocks in this group. Too much borrowing, heavy leverage and rising costs of production hit miners hard when gold prices reached their top in 2011. However, global risk events in Ukraine/Russia and the emerging credit crisis in China have renewed some of the glitter on gold and gold stocks.
Gold prices have been rising, and SPDR Gold Shares (GLD) completed a new inverted head-and-shoulders bottom. It is looking more and more likely that gold will complete a longer-term double-bottom in the next few days, which increases the odds for much higher prices in 2014.
AUY is interesting not just because it is a low-cost producer, which puts it in a good position to profit from the rise in gold prices, but because the stock is also completing an inverted head-and-shoulders reversal pattern. As you can see in the chart, the stock broke through the neckline (resistance) on Feb. 11.
Smart technicians will often wait to see if the neckline turns into support on a retest, which was successfully completed Thursday. We expect AUY to continue to rally to $11.79, the price objective based on the depth of the pattern. This is confirmed with a retracement/extension based on the most recent shoulder.
This is likely a short-term opportunity, so we recommend keeping expectations moderate. A quick resolution in the Ukraine could shake out some of the weaker gold bulls. Positive economic news from China could do the same. But the odds of either of those exogenous events happening is low, and that makes this trade very attractive.
Stronger momentum beyond the initial target could justify holding the position for a little longer; however, we recommend moving stop losses up closer to breakeven when the stock reaches $11.75-$12 per share.
John Jagerson and Wade Hansen are the co-founders of LearningMarkets.com, a source for free investment education and daily analysis of the stock, options and Forex markets. Wade is the co-author of Profiting With Forex: The Most Effective Tools and Techniques for Trading Currencies (McGraw-Hill, 2006). John Jagerson has worked in the capital markets and private equity for most of his career, including investing, writing, education and money management. Together, John and Wade are the editors of Slingshot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get one free month today by clicking here.