John: Today, Greencastle Resources (VGN, TSX-V) opened at 22 cents, its low, then rose during the day and closed at its high of 25 cents. It gained half a penny on CDNX volume of 103,000 shares.
While Greencastle is still up considerably from when we added it back in to the BMR model portfolio at 14 cents in late October, the stock dropped in half to as low as 22 cents from its early December high. That is clearly disappointing but the two charts below should help explain what’s happening from a technical standpoint.
Fundamentally, while there has been no news from this company since the end of November, nothing has changed. So the drop into the low-to-mid 20′s is not something to fear but instead embrace as a golden opportunity for patient investors. This is a junior resource company that won’t keep you up at night worrying about its future. Greencastle has been around for a long time, it’s well-managed, has working capital of at least $6 million, monthly revenue of more than $100,000 from an oil royalty, and three promising Gold projects including property near Richfield’s Blackwater Project. Blackwater is showing more signs than ever that it could develop into a 5 million+ ounce deposit and spark the development of a major new Gold camp in central British Columbia. In addition, Greencastle President and CEO Tony Roodenburg, who holds a substantial position in the company, has made it clear that his intention is to get Greencastle much more active in the Gold exploration space which could mean an acquisition of an advanced fourth project.
VGN Chart #1
Looking at the 6-month daily chart above, we see that an uptrend started on November 22 and VGN gradually climbed to an intra-day high of 44.5 cents on December 6. Since then the stock has been in a consistent decline as can be seen by the string of red candles on the right of the chart. This means the uptrend has been completely retraced to the support at 22.5 cents (horizontal green line). Today there was a bounce indicating the possibility of a bottom. A bullish reversal will require a significant increase in volume. The problem I have with this chart is that it does not have a pattern.
So what do the indicators tell us? The RSI has completely unwound from the December overbought condition and sits at 37%. It’s pointing up but still below its trendline (orange sloping line). A bullish sign will be when it breaks above the trendline.
The Slow Stochastics %K (black line) is low at 17 but pointing up and above the %D (red line) at 8. This indicates a bullish reversal could be at hand.
The Chaikin Money Flow (CMF) shows the stock is still experiencing selling pressure (it lessened today) with the current value at 0.191. On Friday afternoon I took a little time to watch the trading pattern. It was obvious that some investors were bouncing the bid to entice sellers to dump their shares at low prices and some fell for it. Investors were just soaking up any loose shares. With this type of trading pattern the CMF will show selling pressure because the buyers kept lowering their bids.
When I find a daily chart without a clear trading pattern I look at the weekly and monthly charts because sometimes those patterns are large and do not show up on daily charts. In this case I chose VGN’s 3-year monthly chart which you can see immediately below:
VGN Chart #2
Looking at chart #2, VGN’s 3-year monthly chart, the first thing we see is the large “Cup with Handle” pattern (cup outline in mauve while the handle is a downsloping blue line). This is a very meaningful bullish continuation pattern. The Fibonacci levels show that the handle has retraced nearly 50% of the right hand side of the cup. If the pattern retraces lower than the Fibonacci 38.2% level (20 cents), the handle pattern has probably failed. This pattern appears almost complete.
The main resistance levels are at 36 cents and 47 cents (horizontal blue lines). The current Fibonacci target is shown at 53 cents (this is not a BMR price target as we don’t give price targets but a theoretical Fibonacci level based on technical analysis).
Looking at the indicators:
The RSI has declined from a slight overbought condition and could reverse at any time.
The Slow Stochastics is high but it can stay high for a long time in an uptrend.
The Chaikin Money Flow (CMF) indicator shows the buying pressure during the last 3 months has been bullish but it has been declining during the formation of the handle. This is normal because the handle is a consolidation.
Outlook: The 3-year “Cup with Handle” pattern is almost complete and with the bullish positions of the indicators we can possibly expect a breakout from the handle to the upside at any time. We view this scenario as very bullish.
Note: The writer holds a position in Greencastle.
