One of the things I noticed early on in investing in junior mining equities is that they follow technical patterns fairly well. In other words, the charts are much cleaner indications of investor supply & demand with much less influence from HFT (high-frequency trading) and hedge funds than one sees in large cap stocks.
Often times the simplest and best use of technical analysis is to tell us when it is definitely time to hit the exits and get out of a losing position. A recent example of this comes in the form of Midway Gold (MDW.TO):
On March 9th, 2015 closed at .69 – this was the 3rd test of this level since November and as it turned out the following morning, the 3rd time was a charm. March 10th brought a gap down and a large sell-off from which MDW would not recover.
With a clean breach of multi-month support and no buyers in sight, March 10th was a day to sell any existing MDW long positions and get out before worse declines took place. Over the next couple of weeks the stock saw well above average volume as price continued to trend lower, another ominous sign. Even the short lived rebound in early April was fleeting and unable to fill the gap from March 10th.
As it stands now, after last week’s heavy volume selling the March 10th gap appears to have turned out to have been a terminal breakaway gap. Of course, we could not have known that then. However, a breach of multi-month support must be respected, especially within the context of an existing downtrend.
Our partner site’s contributor James Fraser (CEO.CA) has had a bullish perspective on MDW for a few months. Our intention is not to disrespect his work. After all, everyone makes mistakes and the market has a knack for making the smartest of us look silly sometimes. Rather, our goal is simply to help readers make effective decisions in their portfolios and most importantly to avoid large losses. Technical analysis helps us to achieve these goals.
Always do your own due diligence and stay humble.