I am very pleased how this before and after category entry worked out here at the stock and commodity trading forum. When I opened this one up a few days ago I knew it had some potential and am glad that some things can be learned from this case. In many, perhaps most cases, it is a very bad idea to be thinking 'long' when a stock has shown persistently strong down trending price action. Stocks need lots of time to build new bases (aka price work) out of such persistent down trends.
There is definitely a time and place to be brave and try to pick bottoms, but before you do so be sure that you have as much evidence on your side as possible. You want to be sure beyond a reasonable doubt that a stock has done enough flat basing and volume work before a new mark up phase can progress.
The clues that existed in DRD Gold
So then why did I open up this before and after case for Drd Gold? The stock was clearly in a very treacherous down trend with heavy volume all along the way. Here's why:
- There was evidence that Drd Gold elected to do a massive one day selling climax
- As of the initial posting, Drd Gold was at or very near previously oversold WEEKLY Relative Strength Index (RSI) readings
- The actual selling climax day finished the day with a mid range price bar showing me there was already initial demand (more on this in a minute)
- The price action AFTER the selling climax was retesting on very low volume
- The retesting price action had the characteristics of an arcing price action
- A 41 million share day is very difficult to break with ease to the downside with valid volume
Clearly the news was very bad during the time before the 'news'. Bankruptcy talk, earthquakes, a strong rand that only wants to get stronger (not true anymore). I mean geez, how much worse could the 'news' have become?
The Composite Man, the All Knowing Market Force
The question that needs to be asked though is who was stepping up to the plate buying shares of Drd Gold in the midst of panic on that 41 million share downside crash day? Someone must have been buying there. I believe the buying entity there was what Richard Wyckoff termed the composite man. The composite man is the 'all knowing' market force that buys the lows and sells the highs with regularity and has unlimited resources and knowledge much better than most typical market participants.
It is useful to think or frame market analysis this way because it can help you get along side the smart money if you look at the market in terms of 'what would the composite man be doing here' ?
So if we assume the composite man was buying the lows of that panic sell off day, surely it would make sense that after buying up all that inventory, they would want to defend their position right? Well it appears to me that this is exactly what happened during the last few weeks on Drd Gold.
The composite man was buying up inventory on the 41 million share day sell off ending the day with a mid range close. So naturally, that buying needed to be defended on the retest of the low.
Another interpretation is simply that the panic sell off day met demand as it encountered long term support. No matter how bad the panic, or how bad the sell off, every time price meets long term support (or resistance) there is a very high probability in my experience that it will be met with supportive demand (or weakening resistance) even if price initially breaks through that support (or resistance).
Note in the first chart also the arcing nature of the retest of the panic day. This was additional key evidence of slowing of selling pressure and the gradual building of new demand.
Weekly Relative Strength gave a clue
This next chart is simply an illustration of the weekly oversold level as indicated by the weekly price chart plotted against weekly RSI (Relative Strength Index). Drd Gold definitely has lots of more price work ahead of it before any firm conclusions can be made about the permanence of its price at these levels. However, as I indicated in this previous post, the story could be interesting and worth revisiting as the year plows on.
Note that the last time Drd Gold was able to break it's long term down trend, it took about 1 full year of cause building before a new up trend could be established. Will it take that long this time too? I don't know. The bottom line is first Drd Gold needs to establish some sort of a new base (cause building) and break the long green down trend line before anything else of substance can transpire.
Finally the above chart is simply a representation of the over all bigger picture on Drd Gold. You can see that the yellow shaded area represents a secondary price channel. The current monthly price bar, being a bullish hammer is hinting that the price of Drd may eventually be able to climb back within that yellow channel. If it does so successfully then it could imply a move back to 2.5. This premise is based on the simple concept of oscillating stock prices.
Ok, that about wraps it up for this before and after case!
Peace. I’m out.
P.S. By the way, one point that I think I will try to emphasize more and more is the importance of moving on immediately after any target is realized. This could be one of the single biggest mistakes that people make, becoming too attached to what they were originally involved with. This was mentioned as point number 10 here.