first majestic silver

Don't Blink, Many Markets at New Highs?

April 3, 2006

As the first quarter comes to a close, many folks take the opportunity to take the temperature of the market to see where the strengths and the weaknesses may lie. So we join the crowd to consider what our eyes see rather than accepting the description of the picture from someone else. While the fundamental indicators are dissected by the number crunchers and the economists, it is somewhat useful to check the charts to get an idea of where the buying is going on by the institutions. After all, 75% of the funds in the market comes from the institutions. Charts show the big picture and allow us to follow the smart money. Fundamentals indications tend to be confirming signs rather than primary indicators.

Without boring the reader to death, one sees that institutions have been buyers over the past 24 months at Dow 10,000 or thereabouts. The Dow is now 10-11% higher. Any headlines that the Dow is at multi-year highs would, in all likelihood, be used by institutions to place a reaction or to book some trading profits so that their performance may reflect the 10% rise in the Dow. Similarly, S&P 500 looks to be up about 10-12% from its last support area of 1170. This acts more as a confirming indication that reactions are overdue. We also tend to look at stocks making new highs because a strong market should offer many leading stocks in new price high area. Most of the stocks making new highs have been extremely choppy and volatile. Usually (but not always), such behavior from leading stocks indicate either a choppy stock market or an impending correction. Yet again, confirming signs indicate a reaction in the offing. A closer look at the leading stocks shows strength coming mainly from the commodities sector. New highs are being posted consistently in stocks in sectors of metals/ores, mining, oil/drill equipment, industrial metals, etc. Among the 10,000 stocks out there, we pick below just a handful to show the kind of price/volume action one must see in leading stocks. In our opinion, leading stocks are stocks that have based for years on end and then having set-up the foundation, they begin a true and confirmed up trend with rising volumes. It is uncanny how besides the charts listed below, many others in the same sector like Southern Peru (PCU), Gold Corp (GG), Silver Standard (SSRI), etc. show similar charts.

One will note that the volume spike accompanying the price entry into new price high area on leading stocks like Royal Gold (RGLD) and Pan American Silver (PAAS) began well before these stocks started showing earnings acceleration. It is also interesting to note that the chart indicates the accumulation phase began in 2002 on Royal Gold (RGLD) and in 2002-2003 on Pan American Silver (PAAS). As we know, the move begins well before the news becomes widespread and it is very important to make commitments only after a move has truly begun. Once a move truly begins, reaction lows keep pegging higher lows and new price highs keep pegging higher highs. Thus, a confirmed up trend of a series of higher highs and higher lows ensues. As long as these up trending leading stocks keep pegging their higher highs and higher lows, their trend stays in effect. In addition, the price + volume action on each of these leading stocks clearly indicates very heavy volume for 2006, with extrapolated volume levels hitting projected 2006 as the all time heaviest volume year. Even the cheap stocks (those that are low priced and below $10 where the big money is hesitant to go) show some similar patterns, though their basing has been for much shorter durations. The reader can check on the charts for such low-priced stocks like Aurizon Mines (AZK), Cumberland Resources (CLG) and SA (Seabridge Gold) and will notice similar patterns, although of shorter durations.

To project or forecast the future is not possible for anyone. However, it is possible to interpret and execute actions based on current interpretations. Based on our view, placing stops along one's holding just below the last low price would be prudent, especially on monthly charts. It is far more important not to lose than to hit home runs in the stock market. The Hippocratic oath of "first, do no harm" should be incorporated into one's stock market activities just as a physician incorporates it into his own practice.

2006 looks to be just another year like last year. It is an old fact that a trend, once established, will remain in place until definitely reversed. In other words, whatever is happening in the market will continue to happen until it is definitely changed. Nothing has definitely changed. Hence, what has been happening will continue to happen.


April 3, 2006

Brad Koteshwar

[email protected]

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