Technical Analysis: Platinum looks good

In this Technical Analysis Report we re-visit the Commitments of Traders (COT) report, supplied by the U.S. Commodity Futures Trading Commission to see if any metals appear ready to make a significant move.

The report can be used as a leading indicator of commodity prices when using a “follow the smart money” philosophy.

The key to interpreting the report is to understand that the managed money category represents the “smart money” and investors should move in the same direction as that group, while the other reportables category represents smaller traders who are thought to have inadequate information on where prices are headed. Traditionally, investors are advised to go against the direction of other reportables.

The COT report for the week of Dec. 7, 2010, shows that platinum has the most market difference between the two groups with managed money showing itself to be more bullish on the metal than the other reportables.

That sentiment can be read in the fact that managed money decreased short positions by 31% while increasing the number of long positions by 5%.

Conversely, other reportables show an increase in short positions on the metal of 9%, while long positions increased by 11%.

Using the COT report’s bullish signal for platinum as a springboard, let’s now turn to the E-Tracs UBS Long Platinum ETN (ptm-n) to see if it offers any further clues.

While PTM has been trading in a relatively sideways motion since late last September, what is perhaps most interesting is a recent spike in buying volume.

On Dec. 6, volume spiked to 90,000 – its highest level since last November – and unlike the heavy trading in November, the Dec. 6 spike was a victory for the bulls, with the day’s closing price finishing above its open. Significant spikes in buying volume can often be the precursor to a security making larger gains in the near future.

Also of note on the chart is a slight tightening of the Bollinger bands. When the upper and lower bands tighten, it is considered a signal that price could soon break through either the upper or lower band.

Now let’s focus on a few individual platinum miners and explorers that show the most interesting price and volume trends.

Platinum Group Metals (ptm-t, plg-x), which is part of the advanced exploration-stage Western Bushveld Joint Venture in South Africa, has exhibited a classic response to the volume spike and tightening Bollinger bands movement.

A spike in buying volume was seen early last November, followed by lower volumes and a sideways to downwards drifting stock price. Later that month the Bollinger bands began to tighten, and on Dec. 14 the stock made its move breaking away from the $2.20 mark, through the upper band to close at $2.52 on Dec. 17 on 1.5 million shares traded.

For investors looking for a stock that may replicate Platinum Group Metals’ move, Eastern Platinum (elr-t) would appear to be a leading candidate. The company owns the Crocodile River platinum mine in South Africa, and its price history shows a spike in buying volume on Dec. 2.

From that point on a sideways drift and lower volumes ensued, with prices ranging between $1.55 and $1.75. The possibility of a larger move upward can be read in the tightening of the Bollinger bands which began on Dec. 13 and have stayed at a constant width since then.

The last stock we’ll examine is Anooraq Resources (arq-v, ano-x), which operates the Bokoni mine on the north-eastern limb of the Bushveld Complex in South Africa.

Anooraq displays similar tendencies as Eastern Platinum, with a spike in buying volume in November 2010, sideways price movement from that point on and a gradual tightening of the Bollinger bands.

Anooraq, however, has the added bullish signal of the MACD oscillator which shows the MACD line just beginning to cross the signal line from beneath, which is a strong indication of positive momentum behind the stock. That movement may already be under way, as the company’s shares finished 10% higher at $1.32 on Dec. 17.

– The author holds no shares in any of the companies mentioned.