Fundamentals, Charts and Your First "Tell" - VOLUME!!!

Good Morning Readers.

In yesterday’s post I wrote about how important volume was in choosing a holding. It is imperative to practice your due diligence or “do your homework” when picking a stock. Having said this, you can study your charts and know everything about a company that you possibly can but the true “tell” of a successful position is the volume at with it trades.

I will give you a real life example. About two months ago I opened a small position is a holding called Western Lithium (WLCDF). I learned that this company was in a geographically mining friendly part of Nevada and was close to coming into production of Lithium. I read that President Obama had pledged to give a $7,500.00 rebate to anyone who bought an electric hybrid car. This seemed to me like a sure fire company. I opened a position with a dollar cost average of $1.30. For the next two months I watched the stock and noticed that the volume on the stock was anemic. On a good day it might trade 100,000 shares. The stock moved sideways for two months up a penny down a nickel but I soon realized that it was going nowhere. I read all I could about electric cars and lithium ion batteries and found out several important things. 1) Batteries do not like the cold weather. In the south this might not be a problem but here in the northern climates the battery would not hold its charge for long. 2) Batteries, like anything else have a life and they are difficult to dispose of. They are also extremely expensive. Finally, I spoke to my son and we talked about electric cars and he told me something I never read anywhere. He told me that while an electric car was certainly a good idea ecologically, it seemed incredibly inefficient to handle a power source two of three times before it could be used. Any savings that might be realized would be offset by producing electricity, charging up a car and eventually disposing of these batteries. This would surely offset any savings realized by the $7,500.00 rebate that President Obama had proposed. I decided to cut my losses in this holding and put a sell in for $1.28 as a good until cancelled order. Well, I waited almost another 2 months for it to sell, which it finally did yesterday. The point that I am making is that the stock market is a zero sum game. For every seller there is a buyer and vice versa. If a stock has no volume then no one is buying or selling the stock. I put myself in a position of having a small stake tied up for months because I did not heed the most important factor in picking a successful holding. How many shares are being traded on an average day?

Not long ago, mining for rare earths was an American enterprise. As in so many other areas, it was decided to farm out the work to save a dollar. The forth-sighted Chinese took the lead and became the world’s supplier of 97% of these crucial Rare Earth Elements (REE'S). Now it is American’s coming “hat in hand” to petition Beijing as did Oliver Twist for a “little more porridge, Sir.” Demand is soaring in the face of a serious shortage of REE’s. The Chinese are playing hardball as they have cut their exports by 50% and on April 1^st they will impose an export tax and have mandated a severe penalty against illegal smugglers (God only knows what that means). An immediate global call for action and a solution is required but is getting late – very late. Consequently, it is an exciting time for my readers who are positioned to profit from the most promising REE stocks.

For several weeks, I have been writing about one of my favorite holdings, Avalon Rare Earth Metals (AVL). For the last 12 weeks AVL has been forming an ascending triangle consolidation pattern. It is now oversold and has found support at this rising trendline. Two weeks ago there was the latest fakeout at the 50 day moving average which looks eerily similar to the setup in November in which we saw a major move in December on the announcement of impending China’s export cuts. I expect that as the crisis for REE’s intensifies we could see a breakout past $8.00. Once this happens, I think, many “major” firms including China will jockey to try and acquire this company.

Another stock that I have been tracking is The Lynas Corporation (LYSCF). The company is headquartered in Sydney, Australia. The Lynas Corporation engages in the exploration and development of rare earths deposits, and other mineral resources in Australia, which includes niobium, tantalum, zirconium, titanium, neodymium and dysprosium all which have almost recently doubled in price since the announcement that China will curtail 50% of its exports plus adding an export tax. After a shakeout on March 15^th, in which over 6 million shares were traded, Lynas is moving close to breaking out of its 12 week base at $2.40 and closed @$2.19 yesterday. I would recommend this as a buy @ $2.25 or below. Lynas is close to China and Japan and a key factor is that it is expected to come into production within a few months. Once it breaks into the $2.40 level, look for a pull back and for it to be acquired by a “major or a Chinese company. As I have often said in previous posts, when a company is about to be acquired it usually tries to shake out the “faint of heart” traders at least twice. As I mentioned, the first shakeout was on March 15^th. Look for this stock to go to the $2.40 level and retrace once more (on good volume). I bought a small position yesterday @ $2.18 and I will wait for the shakeout (on good volume) and fill my position.

Yesterday Ucore (UURAF) retraced to close @ $.98. Since I have a buy on this stock @$1.00, this might be a time to open a small position to test the waters. As I have said my dollar cost average is $.84 and I would not be surprised to see this stock retest the lows of $.80. When it does I will buy more. That would be a good time to build on your position. As I have said, time and time again, when a stock is about to be acquired it will shake out the “faint of heart” investors as the pros look to consolidate their position. Read my post from Friday March 15^th to learn more about this company.

In all of these holdings, practice your due diligence, check your charts, and be sure to study your first “tell”, the average volume traded.

Stay tuned!