Why Eldorado Gold (EGO) Could Hit $20: A Technical and Fundamental Breakdown

Nothing quite shines like gold: just ask investors of Eldorado Gold Corp (EGO). Based in Vancouver, B.C., the gold production and exploration firm owns and operates precious metal mines in Turkey and Brazil. Last year, the company posted sales of just over $1 billion, up almost 16% from the previous year. As well, net income landed at $104.6 million, up around 130%.

However, the biggest catalyst is the upward trajectory of gold. Certainly, the fear trade has offered a cynical tailwind for the precious metals complex. Thanks to a variety of factors — particularly macroeconomic concerns, geopolitical anxieties and inflationary pressures — the yellow metal has enjoyed a wealth of positive catalysts. As such, EGO stock has tagged along for the ride.

Other elements have helped gin up sentiment. Notably, the Barchart Technical Opinion indicator rates EGO stock as a 100% Buy. It’s more than likely based on the amalgamation of technical considerations that Eldorado shares will maintain its upward trajectory in the near term. Further, analysts overall view EGO as a consensus Moderate Buy: the assessment breaks down as four Strong Buys, two Moderate Buys, four Holds and one Moderate Sell.

Despite the many encouraging signals, investors naturally have concerns about holding the bag. After such a big runup in EGO stock — it’s more than doubled in the past 52 weeks — newcomers to the opportunity may wonder if there’s any gas left in the tank.

Well, according to Barchart Screeners, there is.

The J-Pattern Smiles on EGO Stock

One of my favorite technical signals is the J-Pattern, also known as the J-Hook. Unlike other extractions from the discipline of technical analysis, the J-Hook doesn’t feel like a Rorschach test. If you see the hallmark “J” in the charts, you may be staring at a compelling trading opportunity. Even better, this methodology can be objectively tracked and identified.

Primarily, the J-Hook is a continuation pattern. Following an initial upswing, a minor correction or consolidation materializes. The bullish technical signal is confirmed when the target asset moves above the peak price of the initial rally. Here’s how this looks for EGO stock:

• In the first cycle, EGO stock popped higher from Sept. 9 through Sept. 13.
• During the second cycle, Eldorado incurred a minor correction that lasted till Sept. 18. Notice that the correction only partially gave up the equity value of the initial run.
• In the third cycle, the Sept. 25 close confirmed the J-Hook because the price was higher than the initial rally’s peak.
• Subsequently, the speculation is that EGO stock will march higher from here.

Now, how much higher is anyone’s guess: I’m afraid the J-Hook is not an exact science. Probably, scientists will freak out if I even allude to the “J” as anything resembling science. Nevertheless, the hypothesis is that the confirming breakout in the third cycle suggests that bullish volume has increased. So, the pressure if you will favors the long side of the trade.

Now, by logical deduction, my belief is that $20 is the target for this J-Hook rally. It’s a nice, clean round number. Plus, at a closing price of $18.48 on Thursday, EGO stock is right there. I think the bulls would find it a shame if the gold miner didn’t reach the target.

How to Trade the Gold Fever

If you’re going to deploy options here, there may be two ways to play this game. Broadly, the implied volatility of EGO stock for the options chain expiring Oct. 18 was 35.88%. That’s modest compared to the historical volatility of 33.92%. To me, that calls for a debit strategy.

Looking at the bull call spreads, I’m not liking the very modest short call income for the second leg of the trade. Given that EGO stock pinged as a J-Hook, for the October calls, I think a straight call option may be appropriate. For one possible idea, consider the $18 call, which carried a premium of $1. That means EGO would only need to move up to $19 to break even, which is well within reason.

Another strategy is to consider a bull call spread but for the Nov. 15 expiration date. In particular, the following trade appears enticing:

• Buy the $17 call with an ask of $2.15 per contract (pricing as of Thursday’s close).
• Sell the $19 call at a bid of 95 cents per contract.
• The net debit paid comes out to 80 cents ($2.15 – 95 cents) or $80 when multiplied by 100 shares.
• Maximum loss is $1.20.
• The breakeven price is $18.20.

To extract the full benefit of this trade, EGO stock simply needs to be at $19 or higher by the expiration date. That seems like a very reasonable proposition given the technical momentum and the fundamental backdrop.

More Metals News from Barchart

• With Gold Near Record Highs, Should You Follow Insider Buying on This Dividend Stock?
• Dollar Slides as Chinese Stimulus Boosts the Yuan
• Dollar Recovers Early Losses as T-note Yields Climb
• 1 Standout Silver Stock Under $20 to Scoop Up Now

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.