Gold price comparison a measure of success
With the gold price towards the top of what has been its trading range for the past year, it is timely to take a look at another gold producer.
This week's chart, produced by Paul Ash, Victorian president of the Australian Technical Analysts Association, plots Evolution Mining against the gold price, and we find the two have been tracking reasonably consistently since midyear.
But this hasn't always been the case. Looking back to October 2008, when gold hit a low point, things were in sync, with Evolution touching a low of 20¢. When gold made a record high of $US1895 an ounce in September last year, Evolution hit $1.94, which was a spike but below the $2.22 it reached in September 2010 when gold was around $US1330 an ounce.
For a year or so gold has been trading in a range between $US1540 and $US1895. Since July we have seen a rally, with the metal trying to break through $US1800. Evolution also rallied after bouncing off its lower support range of $1.24 to reach a high of $2.12 on Friday, just shy of its upper resistance level of about $2.18
Ash observes that we are seeing Evolution make its third attempt to break through the upper-resistance level since mid-2010. That creates a formation known as a "triple top", which denotes a lower probability of the stock breaking through on the upside.
"So unless gold breaks through the $1800 level, the Evolution share price is expected to retreat from this level," Ash says. The size of any retreat indicates to technical analysts how much strength is still left in the price.
"If the price only drops to $1.81 then rallies, then it is strong and is expected to push on up and probably go through the $2.12 level. But if it drops to $1.70, that probability reduces," he says. A pull back to below $1.70 would make the likelihood of a turnaround to above $2.12 unlikely in the medium term.
Smart investors looking to buy into the stock would like to see the price rally and close above $US2.18, with a gold price that is strengthening also.
Evolution is a significant goldminer, with a market capitalisation of $1.4 billion and mines in Western Australia and Queensland. It has a strategy of exploration and development and aims to boost production at its Edna May mine to beyond 1 million ounces. Its production costs are on the high side and its mines are old, so acquisition also presents an attractive growth option.
It is run by chairman and chief executive Jake Klein and has Newcrest sitting on its register as a major shareholder with 33 per cent of the company.
This column is not investment advice. firstname.lastname@example.org