Techincal Analysis Report: Is Uranium nearing a bottom?

The story is a familiar one. In a lower carbon economy the world will have to — and already is to some extent – rely more upon nuclear energy to provide a base-load energy source free of carbon emissions.

Connected to the story is the fact that de-militarization, mainly in Russia, has up until now been supplying much of the uranium needed by reactors. But that supply source is dwindling, making miners the source of the future for the industry.

And while this story helped propel uranium prices up to record highs in the spring and summer of 2007 – it was selling for close to US$140 per lb. at that time – the narrative has failed to capture investor sentiment in the same way ever since.

After a dramatic drop in price in the later stages of the summer of 2007 – it had broken below the US$80 per lb mark by the fall of that year – the metal has continued on a steady downward trend.

This in spite of the fact that the story of increased demand for uranium oxide (U3O8) coming from new reactors being built across the globe – but especially in China and India – remains as true today as it did then.

The situation begs the question: could the metal, and the miners that produce it, finally be nearing the bottom of their downward slide? Could a reversal be imminent?

Let’s examine a few key indicators.

The first place to start is with the uranium price itself. U3O8 is currently selling for just a shade above the US$40 per lb. mark.

That price is approaching the previous support level of US$40 that was set back in April of last year. The fact that U3O8 hasn’t traded below US$40 per lb since breaking through the mark from below back in the summer of 2006 as part of its steady march up to the US$137 per lb. mark, means that such downward move would be concerning.

But should the support hold, the move to US$40 could signal a reversal.

Since August of 2008 the metals price has moved in a tightening consolidation pattern making lower highs and higher lows. This pattern is considered a wedge and should the price break through the falling trend line drawn across consecutive tops, with considerable volume, a reversal would be signal.

Let’s turn to some individual uranium stocks to see if there are any leading indicators there.

The first miner to look at when considering a uranium investment is Cameco (CCO-T, CCJ-N). One of the world’s true heavyweights by any standards, the company’s share price has fallen off since the beginning of the year.

Unfortunately for uranium bulls, the technical indicators for Cameco continue to look rather bearish.

The most concerning being the high selling volume on March 3 which brought shares down to $28.10 on over 3 million shares traded.

That represented the highest single day volume since April of last year. The high volume back then, however, was on a day when buyers out-weighed sellers, and it marked the beginning of steady upward trend that only came to an end in early January of this year.

Looking across the more mid-sized uranium companies, Paladin Energy (PDN-T), Denison Mines (DML-T) and Laramide Resources (LAM-T) , while not showing Cameco’s negative volume spike, are not flashing many bullish indicators either.

All three stocks have been moving in a sideways or downward trending motion with little to indicate an imminent reversal.

The one exception, however, can be found in the more junior uranium circuit with Ucore Uranium (UCU-V). While Ucore’s price chart has shared in its counterparts rather bearish descent, the company is the only one to be showing a clear sign of a reversal.

The bullishness comes from its butting up against the upper trend line of its continuation wedge pattern.

Continuation wedges are considered to have formed during an upward trending stock’s correction.

After coming off of new highs the stock’s decline proceeds over a pattern of lower highs and lower lows. The pattern however tightens with diminished volume, with technicians looking for a price breakout above the trend line drawn across the lower highs. It is important to note, however, that such a breakout must be accompanied by heavier volume.

With its price range tightening between 30¢ and 40¢ over the month of February, a break above the 40¢ mark on strong volume would signal a reversal. Currently Ucore shares are trading at 36¢.

Some indicators that support a move to the 40¢ level can be gained from a MACD line that has been gradually trending higher and, perhaps more succinctly, the Accumulation Distribution line.

The Accumulation Distribution line indicates buying and selling pressure. An upward trend in price should be coincident with an uptrend in the line, and vice versa.

With Ucore, however, the selling that began in early October of last year was not mirrored on the AD line. This divergence has continued up until the present as the AD line has held its ground moving steadily sideways while price has continued to trend downwards. Such divergences over the span of months can be leading indicators of a reversal.

Of course any investment decision on the uranium sector should incorporate a more macro view on where the global economy is going and how energy supply, and nuclear power specifically, will factor in.

An interesting clue into whether U3O8 prices are finally bottoming could be read in the movements of the other two key energy commodities: Crude oil and natural gas. 

Uranium’s historic price run-up in 2007 was led the historic run-up in oil prices, and its decline also preceded that of black gold.

On the recovery, however, both oil and natural gas have led uranium. Could the fledgling signs of life seen in both the oil and natural gas prices be a harbinger of what is in store for uranium? Time will tell.

 The author holds no positions in any of the companies mentioned.