Canadian Gold Mining Outlook Still Promising

December 18, 1998

We have written over the past three months of our surprise at the many positive patterns in the charts of Canadian gold mining stocks. Many of the stocks we highlighted saw fabulous percentage gains in the weeks following our analysis—one of them by nearly 500%!

While many of the same technical conditions that we noted in past months still exist in the Canadian golds, we are not quite so optimistic of the overall sector as we were in the fall. Still, potentially rewarding opportunities still exist and we will focus on those few Canadian golds that we believe to be the most technically healthy. As always, we base our technical analysis on charts and technical indicators provided by WIL-ARM (e-mail: techtalk@wil-arm.com), the authority on the Canadian gold mining industry.

Agnico-Eagle Minerals has the type of chart we like to see in an oversold stock in consolidation. Agnico has been in decline since 1995 but has been consolidating throughout 1998 and could be tracing out a head and shoulders reversal pattern with the left "shoulder" and "head" already formed. Volume action for this stock has been positive thus far. At first glance, it appears a bullish flag pattern that began forming last month has experienced failure and broken to the downside. But this is where technical expertise and discretion pay off. Edwards & Magee tell us that an issue that forms a rectangle-shaped flag formation on its chart and then breaks downward temporarily is not necessarily a failure but a false move designed to shake out the "weak hands." Smart money is aware of this and rides out the initial decline. The whole rectangular pattern—especially if it occurs at a bottom (as it has for Agnico)—is nothing more than a pictorial representation of accumulation. This entails an eventual breakout to the upside and perhaps even a magnificent advance. We cannot be sure that this is the case with Agnico yet, but this stock has piqued our interest and we recommend investors keep a close eye on it as a possible buy. If Agnico breaks above $10/share (its immediate overhead resistance) we rate this stock a definite buy. If it declines much below $5/support, it should be sold by all but long-term investors. We guarantee no "Argentinas" with this one (a reference to our pick of Argentina Gold, which subsequently skyrocketed by 500%). But volume for this issue has picked up considerably in recent months from the past three years and this alone portends something big lies ahead.

Speaking of Argentina Gold, the stock that has been our biggest winner to date is still performing admirably from its fantastic upmove over two months ago. It now appears to be consolidating on the charts in formation of a potentially bullish "flag." To be honest, we thought this stock would be nothing more than a one-hit wonder affording fabulous profits to those who went along for the ride upwards but would then be subsequently "shorted" by insiders who felt the move had gone to far too fast. But this has obviously not been the case. Argentina's chart pattern actually looks quite positive and we will remain bullish on this stock as long as $2/support holds (it currently trades near $2.50/share). Volume action is still strong and very much in keeping with a bullish consolidation phase. For those of you who missed the historic (and we do not say this lightly) opportunity to ride Argentina's bull this fall, we advise accumulation of this stock above $2/share in anticipation of another rise upward. Such a rise is likely to take Argentina to $5/share based on the minimum measuring implications of the flag pattern in its chart.

Asia Pacific Resources has two prominent features in its chart that makes us bullish (albeit cautiously). For one, it shows a clear "scallop," or "bowl" formation on its chart that formed between 1997 and early 1998, accompanied by typical volume action for such a pattern (scallops, for those not familiar with technical parlance, are bullish patterns). Second, a miniature "flag" pattern has emerged most recently, which, if it proves to be reliable, is forecasting a move higher to the $5/share level (from its current $3.50/share). Keep this stock on your list of possible buys, especially if $4/share resistance is penetrated.

Another Canadian gold stock which shows a similar "scalloping" tendency is Aurizon Mines. Not surprisingly, Aurizon's chart also shows a bullish flag pattern currently in formation. Volume has thus far been supportive of the bullish outlook. We advise accumulation of this stock even now in anticipation of its next leg upward. $1.25/share should be next on the horizon (from its current $0.75/share).

The bluest of the mining blue chips, Barrick Gold, has a chart distinctly similar to Agnico-Eagle, only much more developed (due to its stronger liquidity). A near-term bottom would seem to have developed and, once again, a bullish flag pattern would seem to have failed. What makes us nervous, however, is that a downside breakaway "gap" has formed in Barrick's chart and this could be quite bearish. Our stance toward Barrick is to wait and see if $25/share support will hold. If it proves to be a strong support, Barrick may be accumulated. If it does not hold, we advise exiting this stock (unless you are a very long-term investor).

Now we come to the fun part. Several Canadian gold stocks show chart patterns that could almost be described as "flat lines," similar to the flat line on a life support monitor that indicates the death of a patient. We do not mean this in an unflattering fashion; to the contrary, we feel this offers a potentially wonderful opportunity for quick and easy profit…if you know how to "play it." The patterns in these stocks are similar to the pattern we witnessed in Argentina Gold just prior to its enormous upside breakout. Again, we make no guarantees, but for speculators who have nothing to lose, we offer the following for your consideration: Black Swan Gold, Britannia Gold, Caledonia Mining, Consolidated Tak, Corriente Resources, Emperor Gold, Goldstake Exploration, and Redaurum Ltd. What do all of these stocks have in common? They all show the "flat line" bottom formation we spoke of. Most show positive divergence in their relative strength indicators (RSI). They all have found strong support and apparent bottoms, and most can go no lower without completely falling off the chart. Best of all, they all appear to be just waiting for the right number of investors to come along and move prices higher. In such oversold, thinly traded issues, it literally doesn't take much to send stocks of this nature skyward.

DIA MET Minerals shows a very positive chart pattern that we interpret to be a near-term to intermediate-term bottom and a strong one at that. After forming a very pronounced "V-bottom" this fall, DIA has proceeded to form a classic flag pattern that portends an upside breakout to approximately $27/share (from its current $20/share). Strong support at $15/share should hold.

Finally, we note with pleasure that Winspear Resources—one of our fall picks that turned out a nice profit—continues to impress. Its chart has formed a nice "scallop," and prices appear to be headed for higher levels. This stock remains a buy above $2/share.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."