Technicals Point to Higher Prices for Stillwater Mining (SWC)

03/10/2010 12:01 am EST

Focus: STOCKS

Some stocks are more fun to track than others, and the fun rarely stops with Stillwater Mining (SWC) given its propensity to make sustained trending moves. The “Deel Momentum Filter,” a powerful MetaStock exploration, has identified SWC as one of the stocks most likely to follow through in the next several sessions…or even beyond.

Let's take a look right now at this high-momentum mining stock.


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Here are just a few of a list of 300-plus fundamentally solid stocks that are also exhibiting high upward daily momentum. Buying these stocks on intraday pullbacks to major support could prove worthwhile for savvy traders.

The graphic above is the latest daily MetaStock exploration (stock scan) results for the Deel Momentum Filter, using a diverse list of more than 300 stocks with above-average earnings growth potential over the next year or so. This exploration seeks to hone in on stocks displaying exceptional trend and momentum characteristics, technical attributes that tend to propel such stocks even higher in subsequent trading sessions, all else being equal.

Of the top three stocks shown in the exploration output, SWC merits special consideration due to the fact that the stock appears to have enough suds left to meet and/or exceed the previous swing high at $14.30—and this could act as a powerful magnet trading setup (aka a self-fulfilling prophecy kind of thing), with more and more traders piling into this stock as the majority of traders' expectations align with the belief that this current swing will indeed take it to that important prior resistance zone. It's almost as if traders are thinking in unison:

"Okay, let's just get this thing over with now. This stock is probably going to the prior high. I'll buy now, ride it hopefully higher, and then make other arrangements should the stock get there as I expect it to!"

Having seen this kind of a setup hundreds of times before, I know those were exactly the kinds of thoughts I entertained before buying into (or passing upon) such a long momentum setup. And as it turns out, many times a stock like this will indeed make it to at least the prior high, if not higher, before experiencing a significant reversal and/or correction.

Aside from the reasoning just explained, there are a few other solid technical measures on the SWC's daily chart shown below:


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The “Aroon (14)” trend intensity indicator at the bottom of the chart indeed confirms that SWC in enmeshed in a strong trend swing, even as the widening spread between the 21- and the 50-day exponential moving averages (EMAs, see red and blue lines) also depicts a stock with steadily increasing upward momentum. The RSI(14) is also well above the all-important 60 level, coming in with a reading of 67.61, which also happens to be increasing at a rapid clip, too.

Playing SWC here can be as simple as buying pullbacks to support on a 30-minute intraday chart (think floor trader pivots, Fibonacci confluence levels, and/or major trend and channel lines). Traders with a longer trading time frame in mind might even consider putting together a covered call trade, perhaps selling one March 2010 $12.50 call option for every 100 shares of SWC purchased. If you can get at least $1.45 to $1.50 for each call sold (assuming a stock purchase price of about $13.70) and the stock gets called away 11 days from now (this is a very short-term trade), you can expect to net an annualized return on this covered call of about 47%, not including commissions.

Given the strength of SWC right now, this might be a trade that's right up your particular trading alley. Of course, if SWC stalls and reverses sharply, you should still have a "get out" point, and set a stop-loss point of the trade at about $12.00, just in case. With the rapid loss of short call deltas and rapid time decay already in force, your loss on the trade will be relatively minor should such a misfortune occur. Just be sure to limit your maximum loss to no more than 1% of your trading account's equity so that a simple stop out doesn't turn into a trading account wipeout.

By Donald W. Pendergast Jr. of ChartW59.com

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