Lou,

Using my limited knowledge of technical analysis, it looks like HudBay Minerals Inc. (HBM-T) broke out of a descending triangle formation. More specifically, it has fallen below the 200 day moving average and breached support at $12. It looks like the next level of major support is at $8 to $9. Is this a good stock to short and what will it take for it to reach support at $8 to $9?

Many thanks,
Norman

Hi Norman,

You have made good use of your pattern recognition skills to identify a potential opportunity to short the shares of HudBay Minerals Inc. ( HBM TSX) but it caught support at $10.00 and now the question is which way is the wind blowing?

The three year chart provides a number of signals that HBM was on the verge of reversing the advance from the December 2008 lows. The RSI signaled that the stock was overbought in September / October of 2009 when it hit a high of $17. At the same time the MACD was turning below the signal line providing another indication that the uptrend was coming to an end.

The stock is currently trading below the 50 and 200 day moving average but did catch a bounce off of $10.00. You identified the descending triangle correctly on the chart so give yourself a pat on the back for the lessons you have learned and please continue to seek out more knowledge in the field of technical analysis. Check out the Canadian Society of Technical Analyst for ways that they can be of assistance in your skills development.http://csta.org/

The RSI on the six month chart indicated that HBM was oversold as we came into May of this year but if you look at the last candlestick the long upper shadow suggests that sellers were in control of the trading on May 11, 2010 and that the bounce off $10 is meeting resistance.

I agree with you that HBM has potential as a short but make sure to take some target practice before you strap on the six gun and head out to the gun fight.

Happy Capitalism!

Hello Lou,

I love your website and check the stock of the day everyday!

You always state “don’t anticipate the bottom, confirm the bottom”. Can you tell me how to do this as I’ve been burned a few times this past year trying to anticipate a bottom?

Kind Regards,
Dean
Kenora, ON.

Hi Dean,

Thanks for your support it is very much appreciated!

The confirmation of the bottom was the break above $47.50

Here is an example of a stock that broke out of a range bound pattern with support at $42 and resistance at $47.50. The confirmation of the bottom was the break above $47.50, with the MACD giving a clear signal in October of 2007 and the golden cross of the 50 day moving average breaking above the 200 day moving average.

The key to a confirmation of a bottom is a breaking through a trend line

Here’s another example of a short term bottom for a short term trade.

If you look at the November 2008 high at $4 and draw a straight line to low of November 20 at $1.40 this is the trend line that provided resistance against an advance. Once it broke above the resistance the MACD generated an upside signal and the RSI started moving out of oversold territory.

The key to a confirmation of a bottom is a breaking through a trend line that is providing resistance and an increase in volume to suggest that the buyers are taking control and the sellers are exhausted. If you have other signals indicating a change in momentum such as the MACD and RSI then it strengthens the case.

I suggest that you also research other patterns such as a double bottom which is a reversal pattern from a decline. In so many charts these days we are seeing such steep declines and big downside gaps that you have to shorten up you time frames and take profits when they are available because they may not be there for long.

Happy Capitalism!
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