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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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A Gold Stock Underachiever

Every bull market always leaves behind a few laggards -- "underachievers" which for whatever reason can't quite keep up with the dominant market trend. This can be true of a broad market rally or of a sector-specific rally such as the precious metal stocks.

In some cases the laggards are left behind for good reason. Perhaps they have a poor earnings history and/or poor sales growth. It could be that management is poor, or that capital is lacking. But in some cases these are legitimate, fundamentally-sound companies with good management that are simply overlooked for some reason. This category of laggards will usually catch up with the market rally at some later point along the curve. It pays to be on the lookout for such underachievers since it can often mean a choice opportunity to buy a low-priced stock (relative to the sector average) and sell at a much higher price all within a short time frame.

One of the things I look for in an underachiever within a bullish sector is a base of consolidation in the stock's price history under cover of low trading volume. This often denotes accumulation by "smart money" investors and is a tell-tale sign of a future breakaway stock. It's even better when the stock in question is trading at a relatively low price.

But what happens when the stock starts to come out from its base of accumulation and begins establishing a steady upward trend? That's when it pays to look at the dominant short-term moving averages to check if they are getting into the proper alignment. I favor the 30/60/90-day moving average harmonic series since this often reflects the strength of the underlying trend and momentum behind the rise in price. An ideal situation is to have the 30/60/90s harmonize on the upside in that order (shortest on top, longest on bottom). Whenever this harmonization occurs it usually leads to at least 2-3 months of an uptrend before the first serious "correction" occurs.

Among the gold stocks, one of the more prominent low-priced "underachievers" is the Amex-listed Bema Gold (BGO, recent price $3.42). The major Wall Street analysts have seemingly forgotten BGO as other high-flying gold stocks received the lion's share of attention from analysts in past months.

As you can see in the 6-month daily chart above, BGO has emerged from an intermediate-term accumulation pattern and has established a nice rising trend above its 30/60/90-day moving averages. The 30/60/90s have only recently become harmonized, suggesting at least some more upside potential before the next correction phase gets underway.

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