Sometimes finding the right stock means going against the crowd, and at the start of the year nowhere was the bearish crowd more vocal than on gold stocks. Since then, the gold mining sector has tacked on 30% in value.
However, the rising tide left a few boats behind. Some may have been leaky with weak fundamentals and poor outlooks. Others may have just been slow in getting untied from their docks. The latter category is the one in which Newmont Mining (NYSE: NEM) falls.
Newmont is one of the largest domestically traded gold stocks, but unlike its peers, it did not find a bottom in December. In fact, its February low was 7% below its December low, following a devastating reaction to its guidance on lower output and higher costs.
But money actually started to flow back into the stock, according to the on-balance volume study, and a real bottom appears to have been set.
NEM began its decent in September 2012, but since November of last year, the decline has morphed into a trading range of sorts. Granted, its relatively low price, especially relative to where it previously traded, meant the trading range was very wide on a percentage basis. But this choppy, if not manic trading served to transition the stock from bear to bull, even as it set that February low.
As the stock market weakens and gold continues to strengthen, NEM finally looks ready to join its sector in higher ground. It is already above both its 50-day moving average and the trendline defining its previous bear market. A move above $ 25.65, only a few cents above its recent price, will confirm an upside breakout and change of control from bears to bulls.
We can argue whether the basing pattern from November through March was an inverted head-and-shoulders with a very small right shoulder. We can debate whether its negative earnings per share (EPS) means it cannot make any upside headway. And technically, we can worry that it is still trading below its 200-day moving average.
But investing is never a clean and easy process. Not all indicators will line up, and if we wait for them all to agree we will likely miss a good chunk of potential gains. I like to use the analogy of a civil trial lawyer. If we can assemble a “preponderance of evidence” we can understand the market’s intentions and profit accordingly.
Here, we have a strong sector and a stock just starting to prove itself as it begins to catch up with the rest. It is a theme my readers see often.
How far can NEM climb if it breaks out? The upside target for the basing pattern is in the $ 30.50 area, based on the pattern’s height projected up from the breakout point. It is also near several swing points seen in the middle of last year.
If the stock moves through that level, there is solid resistance in the $ 35 area from the bottom of the April 2013 gap down and May reaction high.
Recommended Trade Setup:
– Buy NEM on a break above $ 25.65
– Set stop-loss at $ 24
– Set initial price target at $ 30.50 for a potential 19% gain in eight weeks