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Re-entry velocity: Examples with five junior miners

|Includes: CZICF, MGN, RPM.V, Revett Mining Company, Inc. (RVM), SQIFF, TMIAF

The past several months have been just chock-full of unbelievable one and two-day gains for certain junior miners and explorers, most of them based on virtually unforseeable events.

For example:
If nothing else, the above events show just how dependent on external events--mergers, permitting, court rulings, and geopolitical risk--that mining shares, especially those of juniors and explorers, can be. This caprice can work the other direction as well, as when South American Silver (SAC.TO; pink: SOHAF) lost 38% of it's value over several days with news of a Bolivian threat to "recover" state ownership of mines.

Fair enough; as Groucho Marx said in Animal Crackers: "all the jokes can't be good; you've got to expect that once in awhile." Similarly, not all juniors can be winners (although SAC.TO remains an excellent company in my book!).

What to do?
If you already own shares in the five miners bulleted above, you're a happy camper! Your only regret is that you didn't buy more! But what if you don't own them yet? Or, what if you already own them, and want to increase your position?

Lucky you! The mining sector sells down hard, especially with drops in broad stock market sentiment... and we certainly have had our share of recent volatility! As Sean Brodrick said the other day, "it's hard to analyze a market when you can't read Angela Merkel's brain." The ongoing European debt crisis makes for buy opportunities not only within the ups-and-downs of today's headline-driven markets, but also at the end of what is almost certainly to be a new low in the ongoing secular bear market that began in 2000.

How to initiate this? Taking a look at Revett's recent rally and pullback as an example:

As many know, stocks have predictable reversal levels that can be projected using Fibonacci retracements. By plotting the retracements at the start of the advance (or decline) as above, it is possible to make fairly reliable estimations of likely re-entry points. For example: waiting patiently for your pullback to $4.75 on Nov 25th was certainly a better strategy than euphorically chasing $6 shares of RVM.TO with the rest of the crowd on Nov 16th! Had you timed this perfectly, you could have booked 20% profit in under two weeks... despite having missed the initial breakout!

So given all of the above, what are some reasonable re-entry points for the 5 stocks above? Here's what I would be doing (note: this is not investment advice!):
  • RVM: look for re-test at about $4.68 (RVM.TO ~ $4.82 CDN)
  • RPM.V: re-entry at 50% (0.60 CDN) and 61.8% (0.56 CDN)
  • CZN.TO: it might be best to wait for the high to play out, but right now 0.70 CDN appears to be a likely pullback area;
  • MGN: 2.20 or 2.30 USD would be the 61.8% retracements depending on whether you use the high or the close, but... MGN seems to have a true-love affinity for the region between $1.90-2.00; personally, I snap up MGN anytime it goes below $2.00! This one is both a trading monster and terrific long-term prospect (but that applies to any and all of these companies).
  • What about SQI.V? It's already retraced to 50%-61.8%... we've already missed the boat!
Or have we? There's a saying in technical analysis that "gaps are always filled." While demonstrably untrue--"breakaway" gaps may never be filled --in addition to acquiring a few shares in the 50% retracement range (to which it is close as I write), it nonetheless may be worth placing a bid at the base of the original run (here, 0.89 CDN):

Can I rationally defend my belief that SQI.V will hit 0.89 CDN? Nope. But when I look at my miners as a group, all 30-to-50 charts together, there's often a couple of charts like SQI.V that seem "uneasy"... unresolved... or something like that. I could be wrong (and here's where it gets close to a trading-by-tarot sensibility) but my bet is that SQI.V fills that gap and hits ~0.89 when the European debt crisis finally drags all markets down worldwide--a 2008-like event--making for some terrific entry points for those brave enough to buy, as Danielle Park points out in a recent audio piece.

Some caveats
Trading and holding penny miners can be a notoriously risky business, as in the example below. A couple of rules of thumb may help:
  • Never spend any more $ on penny stocks than you can afford to lose;
  • Use stops;
  • Use the "sell-half rule"... when your stock doubles, sell half; you make back all of your initial expense, and you can let the rest ride. Even if the company goes out of business, you've at least broken even. Take the case of Azteca Gold, which had some very exciting findings in 2009 that were later revealed to be questionable. I bought this stock in the teens and could have broken even or doubled my money had I stuck to the "sell-half rule!" But did I? NOOooo! I was left holding the bag (along with many others) when the bad news emerged, and sold at a 50 percent loss! Wow, that was fun! Azteca is now trading under 1 cent per share!
But even with the associated risks, the junior and penny precious metals mining sector remains extremely promising in the intermediate-to-long term. Miss the exciting recent run-up in miners? Never fear... even though the long-term trend is bullish, within the trend the sentiment in resource stocks at some point almost always becomes not simply muted, but so pessimistic that it reverses direction completely. With continuing high valuations for silver and gold, this makes for great buy opportunities in the compelling sector that mining has and will continue to become.

Disclosure: Dirk Burhans owns shares in all of the companies mentioned above except Azteca Gold.