Weighing First Quantum Minerals

The Stock: First Quantum Minerals Ltd.

Trend: The current rally in mining stocks, up 117 per cent in the past three months, has improved the complexion of the TSX. The S&P/TSX Metals and Mining Index bolted another 11 per cent last week to close at its highest level since the autumn leaves started to fall. The index is 8-weeks into its Stock Trends Weak Bearish category, indicating it has scaled above the intermediate-term bear trend (designated by the 13-week moving average trend line), but still exhibits a primary downtrend ( the 13-week moving average is below the 40-week moving average). The mining sector is showing clear leadership as the TSX grapples for some positive traction.

The Trade: Investors are wise to go with the strongest horses in this transitioning market. First Quantum Minerals Ltd. is a leading blue chip mining stock in 2009, more than doubling from the $20 level to last week's high of $49.24. The current crossing of its secondary trend line (13-week moving average) above the primary trend line (40-week moving average), referred to as a Stock Trends Bullish Crossover, signals an appropriate entry point for investors.

As the stock develops along its positive trend, investors can look for guidance from the 13-week moving average trend line. First Quantum could pull back to the $38 level, giving investors a chance to pick up the stock as it takes a breather from its potent rally. Anticipating support at the 13-week moving average trend line in the context of continued sector strength is a classic technical trade for trend-following investors.

The Upside: Last week's move above $45 opens the door for First Quantum to make a move toward the next resistance area at $53. Price resistance is often anticipated at areas that previously provided support for First Quantum in its bearish trend downward. Last summer's brief recovery from a drop to $53 now provides guidance for expected troublesome spots for the current advance.

Technical traders always look for signposts in the price pattern of a stock. These signposts help determine appropriate entry (buying) and exit (selling) points. They also frame expectations for future price movements. First Quantum's graph suggests that the $60 level is attainable if the forces fueling the sector trend remain in effect.

The Downside: Commodity strength is the cornerstone of a healthy and bullish TSX. However promising the current rally, the risk of an extended global recession is a cloud over the materials sector. Trading First Quantum's trend helps protect against a potential pullback. The same trend line that guides entry into First Quantum can be used to set a stop price - the share price point which will trigger a sell order for First Quantum.The trend line support level is now at $38 - immediate drops below this level would be an exit signal for investors holding First Quantum. If the stock continues to rally, the stop price will advance with the trend line. This is the basic structural application of trend analysis for timing a trade.

Skot Kortje has been analysing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995 and will be added to this website in the near-term.