They say, the bigger the ship, the longer it takes to turn it around. When it comes to stocks, the deeper the bear market, the longer it takes to right the ship.
After peaking in 2011, gold and gold stocks have been in a tailspin. Following a failed rally attempt in 2012, the pace of the decline accelerated. By late last year, the Market Vectors Gold Miners ETF (NYSE: GDX) was down roughly 70%.
The best part about trading is that we can pick the timeframe in which we operate. Therefore, we can make some money in the short term while we wait for the major change in trend to develop.
Yamana Gold (NYSE: AUY) presents such an opportunity. Over the past two months, it has developed a pattern that looks to be the end of the most recent phase of its decline and could send prices high enough to challenge their bear market trendline.
From April through this week, AUY has traded in a sideways pattern, and we can see an inverted head-and-shoulders formation. Momentum indicators, such as the Relative Strength Index (RSI), sport rising lows to provide confirmation that something positive is happening.
Resistance at the pattern's neckline at $7.68 was broken to the upside Wednesday. If we apply a simple technique of measuring the distance from the neckline to the low of the pattern and project that up from the breakout point, we get a target of $8.32.
This coincides with the gap left on the charts in April and the lows from late last year before another failed rally attempt. The combination of these factors makes the target compelling.
If AUY clears this target, we can consider a secondary upside target, again based on the inverted head-and-shoulders pattern. I have found that subsequent targets are integral multiples of the first target, and in this case, it would be two times the pattern height projected from the breakout, or $8.96.
Note that the trendline, drawn on log scale charts, from Yamana's 2012 high at $20.59 is coming into view from above. At its current rate of descent, it will meet the $8.96 level in about five weeks.
Every journey begins with a single step, and that is all we are after at this point -- the first few steps as the stock climbs from its lows to challenge overhead resistance and its major trendline. The bears may reassert themselves at that point, but fortunately, we won't have to make a determination for several weeks.
Action to Take -->
-- Buy AUY at the market price
-- Set stop-loss at $7.30
-- Set initial price target at $8.32 for a potential 8% gain in three weeks
-- Set secondary price target at $8.96 for a potential 16% gain in five weeks
This article was originally published at ProfitableTrading.com:
Pattern Predicts Gold Stock's Double-Digit Run in Next 5 Weeks