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Technical Failures Prompted Action Before Fundamental Flaws Appeared - Tuesday, December 23, 2008
In recent weeks we have taken the opportunity to use this section to revisit some of the previously featured stocks that were dropped some time ago based on technical weakness. Studying what happened afterwards should hopefully allow investors to get a better understanding of the importance of having a sell discipline. Limiting losses while they are small is critically important to your success, and this investment system's rule is to always sell a losing stock after it falls more than 7-8% from your buy price. These well-known, high-profile companies serve now as perfect examples that will hopefully allow investors in the future to recognize the warning signs and technical sell signals so they will know when it is time to lock in profits or minimize losses per the investment system's sell rules.
Yamana Gold Inc (AUY +$0.19 or +2.89% to $6.76) now faces a tremendous amount of resistance due to overhead supply, making it unlikely to be a market leader in the near term. AUY traded up as much as +25.4% after it was first featured in the February 2008 CANSLIM.net News (read here). Concerns were raised by a streak of damaging losses in March that led to a 50 DMA line violation and deterioration under its November high close ($15.49). Weak technical action was repeatedly noted, and it was then dropped from the Featured Stocks list on 4/23/08. Poor group action (see tonight's Industry Group Watch section for a look at a 3-year chart of the Gold & Silver Index - read here) and general market weakness contributed to the damaging losses that followed as AUY traded as much as -75% lower since! In the quarterly financal reports that have followed, its sales revenues decelerated and its earnings fell below the year ago period ended June 30th and September 30th. As has often been observed, signs of fundamental weakness commonly become evident long after clear technical sell signal occurred.
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Gain on Lighter Volume to Close Above 50 Day Moving Average - Tuesday, March 25, 2008
An upward trendline, by definition, develops as a stock steadily appreciates over an extended period of time. During that period the stock vacillates between the lower and upper boundaries of trendlines which can be drawn connecting a series of recent highs or lows. In order to ensure the overall health of the stock, the lower boundary should not be violated. Technically, if the lower boundary is violated this signals that the trend is deteriorating and bears are gaining control, making the odds start to favor the possibility of further downside testing.
Yamana Gold Inc. (AUY +$1.21 or +7.71% to $16.91) jumped back above its 50-day moving average (DMA) line ($16.68 now) line with today's gain on below average volume. A broad-based commodity rally helped lift a slew of commodity-related stocks, especially those involved in gold mining and production which have been part of a group showing good leadership (good L criteria). After its recent 50 DMA breach, AUY found support and avoided closing below its November 2007 chart highs that were an old resistance level, exactly where one would expect a healthy stock to find support. It is still well above its 7 month upward trendline and above its 200 DMA line. Now that the market is back in a confirmed rally it is very important for astute investors to build a healthy watch list by continually monitoring strong leaders until they trigger technical buy signals by breaking out of sound bases on heavy volume. A new technical buy signal may eventually occur if the stock trades back into the upper half of its recent trading range then eventually surges into new high territory with a breakout gain on meaningful volume. However, it still has a lot of technical damage to repair after its recent series of consecutive losses on high volume. Meanwhile, deterioration to new chart lows (under its low of $15.19 on 3/20/08) would raise concerns and trigger additional technical sell signals.
Yamana Gold's earnings and sales have increased markedly over recent quarters which bodes well for outlook of this high ranked leader. AUY sports very healthy ranks, and closed -15.2% below its 52-week high, which means that this stock faces a nominal amount of resistance due to overhead supply now. Its Earnings Per Share (EPS) stands at a firm 98 and its Relative Strength (RS) rating is a solid 95. The number of top-rated funds owning an interest in its shares rose from 114 in Mar '07 to 193 in Dec '07, helping to satisfy the I criteria. AUY was first featured at $15.89 in the February 2008 CANSLIM.net News with detailed technical information and an annotated chart (read here). Its annual earnings history is limited, however, leaving some questions concerning the A criteria.
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Leader Rallies Near Pivot Point After Retesting Support Near 50 DMA Line - Tuesday, February 26, 2008
A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 50-day moving average (DMA) line. The 50 DMA line plays a pivotal role relative to a stock's price. If the price of a stock is above its 50 DMA then odds are that its 50 DMA will act as formidable support. Conversely, if the price is below its 50 DMA then the moving average acts as resistance. Healthy stocks sometimes trade under their 50 DMA lines briefly, but usually a strong candidate will promptly bounce and repair a 50 DMA violation. When a stock has violated its 50 DMA line and then lingers beneath it, the stock's outlook gets worse and worse as it spends a greater period of time trading under that important short-term average line. Once the 50 DMA line starts sloping downward it should also be acknowledged that the stock has been struggling for a while, and it might be time to reduce exposure and look for places to put that money to work in stronger buy candidates.
Yamana Gold Inc. (AUY +$0.57 or +3.35% to $17.57) was first featured on February 2008 issue of CANSLIM.net News (read here). However, following that appearance it pulled back to just above its 50 DMA line again. It held above that important short-term average, yet it has worked its way back up to within close striking distance of its 52-week highs. In today's CANSLIM.net Mid-day BreakOuts Report a new pivot point and max buy level were noted based this high-ranked leader's past 6 weeks of constructive base building above its 50 DMA line. Its gain helped it to a new high close just shy of its pivot point. Disciplined investors know that buyable breakouts require considerable gains above a stock's pivot point on more than the minimum +50% above average volume guideline to trigger a proper technical buy signal.
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