The junior mining sector has delivered a bunch of really interesting bullish charts in the last few months. We've seen some very big moves in discovery drill plays and there is a lot we can learn from studying the charts of some of these stocks. While many of them have done the customary round-trip return to where they began, there are some very instructive nuggets to glean from some of these charts. 

Back in late-July shares of Sokoman Iron (TSX-V:SIC) began to rocket skyward. While there were a couple of small down days during its ascent SIC shares essentially went straight vertical for 2 1/2 weeks before topping out on August 7th at C$.58:

SIC.V (Daily)

The trajectory of SIC's rise was of the unsustainable variety; the price moved too far too fast which led to an extreme overbought price & overbullish sentiment condition on August 7th. It turned out that SIC's ~1000% rise in the span of 10 trading days created unrealistic expectations and a fervor around the stock that resulted in a blow-off topping move. The massive full bodied red candlestick on August 7th is the sort of thing you never want to see on a chart of a stock that you own. Sokoman would proceed to suffer a major sentiment/price unwind over the next month before hammering out what "could be" a broad based bottoming pattern. I have recently picked up some SIC shares because I like the risk vs. reward proposition from current levels and the chart looks like a coiled spring from which a rally could begin over the coming weeks. 

Now back to the point of this post. We want to be very leery of stocks that experience rallies with a trajectory similar to a rocket (straight up). These types of moves are rarely sustainable for more than a couple of weeks, and more importantly they often end badly with precipitous declines. The most bullish charts will have a clear price trend from the lower left to the upper right of the chart, however, large advances will be peppered with periodic consolidations that work off extreme overbought conditions through either price or time (or both) - this sort of price action creates more of an upward mountain slope trajectory rather than a rocket going into outer space. 

One of the best examples that i've ever seen of this phenomenon is Great Bear Resources (TSX-V:GBR):

GBR.V (Daily)

After rocketing higher in late-August GBR quickly reached an extreme overbought condition near the C$2.00 level. However, unlike Sokoman GBR proceeded to consolidate in a relatively narrow range over the next six weeks. This sideways consolidation served to reset the chart and build up potential energy for GBR's next leg higher which would take the share price over C$3.00. 

GBR is a wonderful example of what we should look for in the most bullish stock charts. It's also important to note that the most bullish stocks won't experience a more than 38.2% pullback from their highs (and very often they won't even drop more than 25% from their highs). The Fibonacci arc tool (drawn in orange and green above) can help us to roughly gauge how far we might expect a stock to fall before support should come into play and halt the correction. 

A stock that many of you know I have followed closely for months, Westhaven Ventures (TSX-V:WHN), is another example of a bullish stock chart that has experienced a large advance within a relatively short period of time:

WHN.V (Daily)

WHN reached an extremely overbought condition at C$.92 on October 18th and proceeded to consolidate its gains within a falling wedge pattern over the next five trading sessions (working off much of the overbought condition in the process). This pullback also occurred on declining volume which is something that we should watch for closely; 'bullish' corrections should be fairly shallow and occur on relatively light volume. Since peaking at C$1.34 on October 31st WHN shares have pulled back on declining volume - once again WHN advanced powerfully and proceeded to consolidate its gains through both price and time on declining volume. 

It's also worth noting that in all three charts above (GBR, SIC, WHN) each stock broke-out to the upside from relatively flat broad-based bottoms - from my experience these types of bottoming patterns have a tendency to unleash a tremendous amount of pent-up energy. 

To summarize, the most bullish stock charts will...

  • Rise on heavy volume and pull-back on declining volume. 
  • Have a daily-RSI(14) that consistently holds above the median line (50) and regularly rises into 'overbought' territory (above 70).
  • Not suffer pullbacks of more than 38.2% (and often not more than 25%). 
  • Work off overbought conditions through periodic corrections via either price or time (or both). 
  • Often launch into powerful uptrends from broad-based bottoming patterns that have built up a tremendous amount of potential energy over many months (or years). 

Disclosure: Author is long shares of Sokoman Iron (SIC) and Westhaven Ventures (WHN) at the time of publishing this article and may buy or sell any of the stocks mentioned at any time without notice. 


DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.