Technical Analysis Report: Big Gold Miners (February 01, 2010)

With gold still grabbing the lion’s share of the headlines in the investment community, we thought it would be prudent in this week’s installment of The Technical Analysis Report to examine major gold producers with market caps of $5 billion or more.

On the TSX, such a list includes Barrick Gold, Goldcorp, Kinross Gold, Yamana Gold, Agnico-Eagle, Iamgold and Eldorado Gold.

While the group as a whole is exhibiting signs of a downward trend, three companies merit closer inspection.

As the world’s largest gold producer, any examination of large-scale gold miners should start with Barrick Gold.

On the fundamental side the company had the highest earnings per share for 2009 at $1.88 per share, but was trading at the lowest Price-to-Earnings ratio at just 20.9 times (compared with 54.6 times for Goldcorp; 39.1 times for Kinross; 25.9 times for Yamana; 34.9 times for Iamgold; 54.6 times for Eldorado and a whopping 98.2 times for Agnico-Eagle).

While such fundamental metrics are favourable to Barrick, on the technical side of things, the outlook isn’t quite so rosy.

The Money Flow Indicator, much like the Relative Strength Index (RSI), measures the rate at which money is flowing into a particular stock — only Money Flow also includes volume in its equation. For Barrick, the indicator is trending towards the bearish overbought section, but has not yet fully flashed the signal.

The Accumulation Distribution line — a volume indicator whose usefulness is based on the premise that volume often precedes price — is trending below the 0 benchmark, which indicates that selling pressure is outweighing buying.

The strongest indicator from the Accumulation Distribution line, however, is when the line shows a divergence between itself and price (i. e. a bearish signal would flash when price is rising while the Accumulation Distribution line is falling). In the case of Barrick, no such divergence is visible in its recent trading history.

Moving to a slightly smaller gold miner, but one that also shows some bearish signs, we’ll examine Yamana Gold.

The most noticeable technical indicator when looking at Yamana is the strong indication that a head-and-shoulders top is forming.

If the company’s shares were to break through the $12 mark (they are currently trading for $12.15) a strong warning signal would be triggered.

Head-and-shoulders top and bottom formations are considered one of the most reliable technical indicators. It should, however, be noted that the length of the correction is often proportionate to the length of time that the formation takes to form. In the case of Yamana, the head-and-shoulders formation has formed over a four-month period — not a particularly long period of time — indicating that a correction would not necessarily be deep and long.

As for other key indicators, they also share in the bearish sentiment.

The Accumulation Distribution line has fallen below the 0 mark, indicating that sellers are driving volume.

The Money Flow line has just bounced off the lower limit of the overbought range, while the RSI indicator has broken below the 50 mark, both of which are bearish.

Also of note is the MACD line has turned downward in the direction of the signal line. If it were to cross the signal line from above, it would be yet another bearish indicator.

Of the companies examined, Eldorado Gold, notwithstanding its low EPS and high P/E ratio relative to its peers, is showing the strongest technical indicators.

Chief among them being the company’s price chart.

Unlike its peers, Eldorado has enjoyed a steady climb since late June 2009. While all the other gold miners examined display, at worst, a “rolling-off” pattern from previous highs, and at best, a continuation pattern, only Eldorado’s price chart shows an unbroken ascent.

Combined with such strong price momentum is confirmation from the Accumulation Distribution line. The line is in, by far and away, the most positive territory of any of the other miners examined and has moved upward in stride with the stock’s price gains.

The MACD chart has also confirmed the new highs with higher highs, although the MACD line itself has recently turned downward towards the signal line, mirroring the action of its peers. A crossing of the signal line, as mentioned above, would be short term bearish for the stock.

— The author owns none of the stocks mentioned in the above article.