Revisiting Some Radioactive Ideas
What's next for U308?
By Frank Barbera CMT. April 8, 2008
It was late August of last year when I sat down to update readers on the outlook for Uranium stocks. At the time, the sector had been going through its first major correction following several years of unbridled advance. Several months earlier in my newsletter update on June 21st, 2007 we became concerned that the Uranium sector was headed for a serious decline. In that update, we stated,
URANIUM: In addition to the Gold and Silver universe, our investment tastes have led us to develop a strong fondness for Uranium Miners where a raging bull market has been present these last few years. Another sector that we believe is engaged in a long term, secular bull, the Uranium Miners are also currently potentially in the act of turning bearish. We show the charts of Denison Mines, Strathmore Minerals, and Cameco on the next page --- all of which are sporting potentially bearish divergences and/or topping patterns. While we like all of these companies a great deal, and we admit, we could be wrong, in our view, the fact that a few months have passed during which time Uranium prices have soared, while the stocks have been unable to advance tell us the stocks are acting very heavy and could be ripe for a major decline. For those of you who follow this sector and have profits accumulated, our advice would be too tighten up stops and let the market take you out of your long positions if it moves down from here. We intend to return to some of these names later on, and will be following them closely in the weeks and months ahead, as we do like the larger, long term story.
At the time, we then included the following charts of several big name Uranium Miners as follows:
After prices began to dip in August, we felt confident that our initial call was correct and that indeed a larger long term correction was in the making. In our regular column for Financial Sense dated August 28, 2007, we featured Uranium and Uranium Miners stating,
"Now there are those that would say that's the entire bear market. Yet, what is common in situations like this is for prices to retrace a proportional amount in relation to the advance which came before. In the case of the Uranium stocks, the percentage increase seen in the last few years is measured in the thousands of percents. When viewed on a semi-logarithmic scale, we note that to date, the very steep percentage decline off the high has only approached a minimum .236 Fibonacci retracement. More common, would be a .382 fibonacci retracement which could carry the index even lower toward the 420 level, with index closing today at a reading of 902.50.
Ok, we can hear the cringe, and readers should understand that while that type of move is possible, it may not in fact develop. What we are trying to point out is even if the entire sector were to be cut in half again from present levels, it would still fall into a clear cut "Wave 2" type of outcome, and would not change the very long term secular bull market view. Admittedly, a move down to the low 400 level on this index would be an unbearable amount of pain, but it is possible within the context of a major crash in the global markets that readings like that could be seen in the months ahead.
For now, the best approach is to be a trend follower and recognize that the trend is now definitively down. Until we see the kind of basing action that would suggest momentum divergences and downside deceleration, readers are advised to remain cautious and ideally on the sidelines and out of harm's way with regard to this group. In many cases, corrective Wave Two patterns traces out an A-B-C structure, within which it is possible that Intermediate Wave A of Primary Wave (2) has just recently bottomed. In this vein, a counter-trend "B" Wave advance could provide those holding these stocks with a loss, the opportunity to reduce the loss into strength and then stand aside as prices move down in Wave C, and into a more important final low."
We attached the following chart in that commentary which showed the initial "A" Wave decline which we felt was complete, but which as we stated was very likely to be part of a much larger A-B-C decline.
Above: the GST Uranium Index (from August 2007)
Updating that prior chart through last night's close we see that our instinct for the "A" Wave Low back then (In August 2007) was correct and that indeed a very substantial "B-Wave" rally ensued. Following that "B-Wave" rally, prices have subsequently gone through the very extended and damaging "C-Wave" decline which so far has carried the index down to a low print of 556.31 as of March 31st, 2008. Now, that's not quite the "low 400" level that we wrote about seven months ago, but the overall wave structure and "look" of the correction couldn't have come together any more neatly. In fact, during A-B-C corrections, there is a very high tendency for Wave C to measure out in percentage equality with Wave A.
Above: the GST Uranium Index through last night's close. Have we completed a long term A-B-C correction? The odds are rising...
Above: Wave C equals percentage decline of Wave A
As we can seen in the chart above, Wave C down was almost exactly the SAME PERCENTAGE decline as Wave A with Wave A totaling (4/9/07 peak at 1389.58 less the A Wave low on 8/16/07 at 684.74 = 50.72%) with Wave C totaling (1116.04 Wave B peak on 11/2/07 less 556.41 on March 31st = 50.14%). What's more, the declining waves were also very similar in terms of overall elapsed time with Wave A taking up 90 trading days on the downside, and Wave C unfolding over 101 trading days into the March low. Within the overall A-B-C structure, Wave B retraced exactly .66% of the prior A Wave decline. If we plot the Primary Wave II correction on the same longer range graph, we find that prices retraced about 1/3 of the prior entire bull market run (does that sound strange to anyone?). If so, it should not as this is simply what bull markets periodically do, and constitutes nothing but a "normal" correction even though the absolute price decline from high to low so far has been (4/09/07 1389.58 less 556.41 3/31/08) a stunning 60%.
Above: Updated long term view of GST Uranium Index
In addition to the Fibonacci retracement and the overall high quality of the corrective Wave Structure, we see other evidence that prices are nearing an important low. Momentum indicators, for example, are now showing quite the pronounced momentum divergence on indicators like MACD and RSI. While there is no rule that says there cannot be one more minor bounce followed by one more set of token lower lows creating the appearance of a "second" divergence, what is already at hand is more than enough to suggest that NOW is the time to start paying very close attention.
Above: GST Uranium Mining Index with 14 day RSI note distinctive potential "W" bottom and strong positive divergence on the RSI.
Above: Alternate Count on Uranium Stocks, Wave C low still not quite in place, but getting close...
In keeping with the prior thought of a potentially slightly more complex bottom, this is still a reasonable possibility. While we believe that there is solid evidence coming together that the March low could have been a final low, it is not impossible for prices to trace out a five wave wedge within Wave C. If this alternate count is going to play out, then prices will rally slightly over the next few weeks and then retreat back down across the range to make one more final new low. That would then complete a 5 Wave decline from the B-Wave November high, at which point the odds will be overwhelming that a final and very major low is in place for Uranium Miners. We will have more for you on the subject of a potential bottom in Uranium Miners and the Metal itself in Part II of this update next week, so stay tuned.
Stocks closed lower on Tuesday with the DJIA falling 33.63 index points to end at 12578.80, with the NASDAQ Composite ending lower by 16.18 index points to finish at 2348.65, a loss of .68%. For the broadly followed S&P 500, it was a losing session with the S&P easing 7.00 index points to end at 1265.54, a loss of .51%. The 10 Year Bond yield ended at 3.56%. That's all for now,
© 2008 Frank Barbera