Wednesday Report- Uranium Part II

Uranium part I revealed the ultimate bullish fundamentals of the uranium market, but also emphasized the importance of exercising patience. Ultimately bull market fundamentals exist, but the market doesn’t trade on fundamentals, at least in the short and intermediate term. It trades on liquidity, and for now the bid is not there. The sector is in the process of forming a bottom, but it would be unwise to go in whole hog with an entry position just because one can see a bullish eventual outcome. This past week proved that!

So before going any further analyzing the uranium sector I would like to review some investing concepts pertinent to establishing an investment position in such a volatile sector.

Volatility– One should not think of risk as the same as volatility. The two are not one and the same. Just because a stock moves up and down in large percentages does not make it risky. Most don’t understand this and think volatility is risk- it’s not. Volatility is actually the opposite side of the coin as liquidity. Illiquidity generates volatility. Since most think of volatility as risk it mentally blocks them to be able to use volatility as a tool to be used in their favor. Instead, volatility rattles them and often shakes them out of positions.

Using volatility to our advantage, we must be able to ride up and down through a trading range without getting rattled or shaken out and to be able to see it as an advantage for us. This skill set is particularly relevant in the uranium sector since they’re the most volatile stocks in the universe. The uranium sector, more than any other, requires one to be either a contrarian or be a victim.

Contrarianism– Such a misunderstood concept. How many investors love to spout the phrase “I am a contrarian” as if that somehow makes them a genius investor. More often than not it just means they are about to get run over by a truck. You can’t just be a contrarian just of the sake of it. Be one when it makes sense to be one. You must do your homework, you must asses the probabilities of the market being wrong. You can’t just be a dumb ass and think everyone is wrong because you are right.

The way to make the real money is to realize that price may be a liar. Price does not predict as well as everyone thinks. This is where doing your homework comes in since price often doesn’t tell you what you need to know. One should create his own investment thesis, if it is against the crowd, well then I guess that makes you a contrarian. If your trade is not priced into the market that’s where the value ultimately is if you are right. You make an asymmetric bet where the probability has been not been priced in and it’s the pricing in of those probabilities where all of the money is to be made.

Being a contrarian is such a challenge since being ahead of the trend often means being wrong for a while. However, one needs to be seasoned enough to understand the difference of being wrong and not being right-yet. One must develop a sense of how the world is changing. The average person is unable to understand change and instead just extrapolates the current trend.

Trade Sizing– A fundamental concept that separates the amateur with the seasoned investor. Without proper trade sizing one stacks the odds against oneself for an ultimate successful outcome. This is particularly applicable to the uranium sector due to its inherent volatility. Determining the correct size of a position is related to why I caution against making grandstanding bottom calls as it encourages a deep plunge into a sector where one really can’t know for sure if the bottom is in fact in. Better to take an initial position and look for bottoming action.

If a position is too large you will likely get knocked out, whereas if it is right sized you can ride the volatility and hang in there. You will be in a position to press your bet when conditions dictate. You must consider and match your time horizon with your investment thesis. This is particularly applicable with uranium as we know its not yet prime time, but it will be, it’s just a matter of time. The question is in how much time and when will the market begin pricing higher price in? If the thesis requires 5-7 years to run then we need to size our position for this time period. Stated differently your investment horizon must match your idea horizon

This uranium sector is a wile beast. We can use it to make huge returns, but we need to bring our best game to the fight. Equip yourself with the appropriate tools and we can harness the power of this sector.

The Cycle

The uranium sector can fly higher than you can imagine and fall further than one can predict. Due to the inherent volatility the way to make a fortune in the sector is to buy in the bottom of a cycle. The best way to do this is to wait for a bust. We have now seen such bust as was described in part I so we know that we are now in the buy zone. It’s just now a function of refining the entry point.

Uranium- The incredible metal.

Uranium is a super concentrated metal. It is so dense that a one gallon milk carton filled with uranium would weigh 150 pounds. 13 of those milk cartons of uranium produces the same amount of energy as 80,000 barrels of oil. It’s relatively plentiful, with 40 times more of it in the earth’s crust than silver.  In a future powered by electricity uranium is an indispensable metal.

All markets are cyclical… So it helps to know where you are in the cycle-Plunger

I spend a lot of time thinking about how price fits into the big picture. It is why I have expanded Robert Rhea’s psychological phases of markets into a Chartology model. I find it’s an essential element in my tool box which gives insight into where a market is in its cycle. Applying this skill set towards uranium is somewhat problematic since its such a small sector and there are only limited data samples. So I am going to use Cameco as a proxy for the industry in my analysis. Cameco produces 20% of all industry production and is a company which must ultimately survive on its own as it’s not subsidized by a national government. Production from Kazakhstan however, is somewhat artificial as initial exploration and development occurred under the Soviet model where cost was not a prime consideration. Much of the development would not have occurred using a profit and loss discipline. So I think an analysis of the price action of Cameco offers us the best proxy of industry performance.

Uranium Stocks Secular Bull Phases

As Rambus often says nowhere else in the world are you going to get the following insight and analysis. It’s unique and not to be found anywhere else. IMO it’s the principle benefit of what this site delivers. In order to identify the cycles of the uranium market I will adapt some major assumptions which as of yet are unproven. My chief assumption is that we saw a major bear market bottom in late 2016. Later on I will show you the model and analysis which leads me to this tentative conclusion. In Part I we saw the long duration bull markets that have occurred in the uranium price. It is my premise that we are currently in the third secular bull market in uranium and it began in the year 2000. Phase I, the accumulation phase, lasted from 2000 to 2002. Phase II, the mark-up phase, lasted from 2002 to 2007. In phase II Cameco went from under $3 to $48 and whenever sectors have such huge gains it typically requires prolonged periods to consolidate those gains. This consolidation period appears to have taken 10 years in this sector. This is similar to the rise in oil from 1972-1980, undergoing a rise from $2 to $40 requiring a consolidation lasting 24 years before it could break out of its consolidation trading range.

A long term secular bull market typically has several cyclical bull and bear markets within it. Since its top in 2007 CCJ has been in a long term 10 year consolidation of its massive move from 2000-2007. This consolidation has consisted of 2 cyclical bear markets and one cyclical bull market. Strung together this retraced 85% of its move from its 2000 low. A brutal retracement, but recall these are the most volatile stocks in the universe remember? Using this model what lies ahead still is phase III, the blow off or mania phase. Typically in Phase III price breaks through the previous top of phase II and accelerates from there. Capital is drawn into the sector and valuations go to previously unimagined levels. Recall NASDAQ in 2000, or oil in 2008.

Phase II Consolidation (takes form as Cyclical Bear & Bull markets from 2007-2016)

The chart below zooms in on the 10 year consolidation of the massive 2000-2007 move. Here we have 3 clear phases of a bear market. Phase I (Distribution Phase) includes the crash of 2008, but in retrospect the crash was just a temporary diversion of the distribution process. This bear phase actually included a cyclical bull market within it. This all sounds contradictory, however one can see that despite price rocketing upward for 2 years it was really all part of a distribution phase… or phase I. Shares were distributed from informed forward looking investors who understood market cycles to the suckers all lathered up through positive price action.

 

Cyclical Bear Phase II- This began in early 2011 in what I call a head test or bull trap. Price often spikes pulling in the last bulls prior to a major decline. Note the point of recognition (POR) came early in phase II. POR’s always come in phase II and was particularly violent due to Fukashima. But note that last bar before the gap down occurred before Fukashima. It occurred on 7 March 2011, whereas the earthquake was on 11 March 2011, so the downtrend was already asserting itself, Fukashima just added a big push. As we saw in the gold market in 2013 following the Goldman raid markets typically enter a consolidation after a phase II POR crash. We see this in the 10 point diamond consolidation that lasted 3 years.

Mr. Bear gets devious.

In typical fashion before doing a slice down through the APEX of the diamond Mr Bear delivered a bull trap in the form of a false breakout to the upside of the diamond. After the breakdown we then see a backtest and then  price resumed its bear market decline. Having spent 3 years in a bear market consolidation and then sucking in latent bulls in its bull trap it was now fueled up to resume a relentless 2-year decline. This decline was in fact a measured move impulse coming out of its diamond consolidation. Note the impulse moves entering and exiting the diamond are virtually equal, a vicious 59.5% decline.

Cyclical Bear Phase III- Annihilation

The separation between phases is observed with a counter trend move. Here we see in Jan 2016 a 7 week BMR which relieved downward selling pressure. Now recharged Mr. Bear pulled out all the stops and applied the thumb screws. That’s right, the dreaded capitulation of phase III… the annihilation. This is where severe bear markets end. Non-stop selling crescendos into an annihilation drive. All hope is lost for a turn, liquidity is removed and comical selling asserts itself. Its a pretty ugly affair. We see this in the depicted 8 month annihilation drive where Cameco having already dropped 73% from its highs went into a 44.8% crash. Simply brutal.

A completed Bear Cycle

The above analysis is the main reason I believe the bottom of October 2016 was THE bottom. The price action since October up until today doesn’t convince me that we are in a bull market, however its the fullness of the process leading into the October price level which speaks the most to me.  We simply saw enough to recognize the worse is likely behind us. Certainly we could double back and retest that bottom, as painful as that would be, but if we have  sized our positions corectly we can survive that process.

It is not my intent to mark up the entire uranium sector and provide recommendations. I regard it more important in the early stages to focus on the process instead, that’s why we have covered the ground we have. Once the bull asserts itself we will get larger gains from companies moving projects into production. Discovery companies will delight, but it’s the producers that will deliver the big gains. Therefore that’s my focus and US based companies may be the biggest performers due to the wild card factor.

Cameco

It’s the Big Dog. 20% of the world’s production with 3 of the world’s top mines. Unbelievable grade in a safe jurisdiction. Will no longer do long term contracts at existing prices. If you are in Uranium this should be your core holding. Looks to still be in a bottoming process. Note the 30 W EMA is now tilting down. Give it some time.

Energy Fuels

After CCJ this is my preferred company. US Based production with permits in place. Able to ramp production the most and the fastest of all the companies. This is the spec play to own IMO. But look at the power dive its been in over the past 8 years…Gosh. Appears to be attempting a bottom but the 30 W EMA is rolling over and stochastics are still plunging. Keep watching it and nibble a little down the road. Management tends to deliver surprises with financings when they run out of cash.

Dennison

Its been a dog of the sector. A resource royalty family owns and controls it through the Lundeen family. Rick Rule refuses to get too excited as he told me there is not a rush to own it. Chart wise, maybe we have a double bottom in the making. Keep an eye on it.

Uranium Energy Corp.

Amir’s little US based Uranium play. ISR production, with a thin balance sheet. Fortunately for them they pulled off a decent financing during the pop. But they desperately need a higher uranium price to make it work. They are in a battle with the clock. Tic Tic Tic.
But if you want a US Based super leveraged play you have it all here. Amir is a very well connected capable operator. Don’t ever sell him short. Like the song says, he’s a smooth operator.

Fission

Yesterday’s darling. Just seems like yesterday this was the go-to explorer. Things have cooled down as this Athabaskan play is not as high grade as once thought. But it could be bought out at some point. Like the others more bottoming action with a 30 W EMA that’s rolling over.

GoviEx Uranium

Can you say Bull Flag?  That’s what it looks like we have here. This is Robert Freidland’s little project that he is training his son on. I have met the kid and I thought he was a mini-me arrogant jerk. But that’s what one would expect if you were Freidlands son right? But that doesn’t mean you can’t make a fortune with this company. Ausie based seems to have now finished up its much needed correction.

 

NexGen Energy

This is currently the go-to discovery play. High grade, and it will be a mine. It’s obviously marching up the ladder of chartology consolidation patterns. Looks ready now to impulse up into its next. Might want to start buying this one right here.

Conclusion

I have discussed the tools to approach this sector. Think about time horizon, position sizing and bottoming action. It does not serve us well to say the bottom is in let’s go whole hog. But having said that I do think we are in a bottoming process. We don’t know how long it will last as there is a certain amount of game theory going on between utilities and producers. Utilities don’t want to believe what suppliers are telling them. Secondary supply is dwindling, while there is still a supply overhang. Will the market slowly discount the positive future fundamentals or will it wake up to the future reality all at once and have utilities all respond to new purchases at the same time? Could it develop into a buyers panic?  That’s the game!

It appears the broad sector is in Weinstein stage I. It has not entered stage II. The big bet is when that moment will come.

 

Wednesday Report…The Most Hated Bull Market in History : Update

The PM complex has been taking up most of my time the last couple of weeks so tonight I would like to update you on some of the stock market indexes. No matter how one wants to spin it the US stock markets have been in a bull market since 2009 by any trading discipline. It has climbed the proverbial wall of worry which is needed to create such a dynamic bull market. Most of the charts will be long term in nature which puts the bull market in perspective.

The first chart is a 20 year monthly chart for the INDU which shows you “The most hated Bull Market in History”. Below the INDU chart is just a plain chart for Gold with no annotations on it. One is in a bull market and the other isn’t. Where has your money been ?

We’ve been following this next chart since the day it broke out above the top rail of the “Jaws of Life” pattern back in November of 2013. Little did I know at the time that the backtesting process would take nearly 2 years to complete, but in the end it was worth the wait. https://rambus1.com/2014/11/19/wednesday-report-49/

The quarterly line chart shows the beautiful Jaws of Life consolidation pattern with a perfect breakout and backtest to the top rail.

To understand what is really taking place right now in the big picture, this 75 year chart for the INDU puts everything in perspective and is probably the most important chart to view. Very few investors on the planet can even grasp what a chart like this is saying let alone let alone invest their hard earned money in what it’s saying. Keep in mind we’ve been following this Jaws of Life consolidation pattern actually before the INDU finally broke out in October of 2013. Compare the breaking out and backtesting process of our current Jaws of Life to the massive H&S consolidation pattern of the 1970. We are currently in the early stage of an impulse leg up which takes place after a consolidation pattern is finally matured.

Below is a 20 year monthly chart for the SPX which broke out of its massive 13 year flat top expanding triangle in 2013 and has never looked back.

This 75 year quarterly chart for the SPX that is similar to the 75 year quarterly chart for the INDU we looked at earlier. During its 1970’s consolidation period it formed a bullish rising wedge which led to its secular bull market. The 2000’s built out it’s recent massive consolidation pattern, the flat top expanding triangle. Note how small the 1987 crash looks on this long term chart, It was was the end of the world back then.

If the 75 year charts for the INDU and the SPX are showing us that we are in a secular bull market then we should see the Transportation Average confirm the bull market is for real. Below is a  20 year monthly look at the Transportation Average which shows a very symmetrical H&S bottom with the head forming at the 2009 crash low. Note the price action at the top of the chart that broke out of a smaller well defined H&S consolidation pattern.

The 100 year quarterly chart for the Transportation Average is trading up close to its all time highs after breaking out from is large H&S consolidation pattern we just looked at on the chart above.

The reason the RUT has been lagging a bit lately is because it has been testing the top rail of its almost 5 year black expanding triangle. The H&S that makes up part of the expanding triangle strongly suggests that the RUT is going to breakout to new all time highs which it is doing this week.

Below is a 20 year monthly chart for the RUT I’ve never published before. It’s similar to the Jaws of Life, but this big consolidation pattern is a 15 year bullish expanding rising wedge. Again, note the big H&S consolidation pattern that is making up part of the blue expanding triangle we looked at on the chart above. That is telling us that the breakout above the top rail of the blue expanding triangle is going to take place.

Lets now look at a few “foreign” markets to see what they look like starting with the $DAX. Just like the US stock markets the DAX built 12 year black triangle consolidation pattern with the smaller blue triangle pattern building out toward the apex letting us know the big pattern was going to breakout to the upside. Six months ago the DAX broke out of the blue bull flag on its way to new all time highs.

The FTSE built out a massive 15 year rectangle consolidation pattern. Note the small H&S bottom that formed just below the breakout point which told us the breakout would happen.That right shoulder was formed during the night of the BREXIT vote when it looked like the end of the world for England.

There are a few individual sectors that have been consolidating for some time now which look like they may be ready to make a move. This first sector is the $BKX, banking index, which broke out of a black expanding triangle late last year and has been in backtest mode testing the 30 week ema this week as support.

Another important sector that is just breaking out of a large consolidation pattern is the XHB, Homebuilders etf. Last month it broke out above the top rail of a beautiful 4 year 8 point diamond consolidation pattern.

The XLV, healthcare sector, has built out a year and a half triangle consolidation pattern. As this sector was one of the strongest out of the 2009 crash low it needed to consolidate those gains by building out the blue triangle consolidation pattern.

Probably the strongest sector of all out of the 2009 crash low was the $BTK, biotechnology sector, which has been consolidating for the last year and a half forming a blue expanding bull flag.

For the last year and a half the $SOX, semiconductor index, has been leading the tech sector higher.

This last sector we’ll look at tonight is the $DRG, Pharmaceutical index, which is building out a possible bullish falling wedge which has formed at the top of massive impulse leg up out of the black 12 year bullish falling wedge.

When I look at all these charts above it’s hard for me to see a long term bear market on the horizon. We are going to get the inevitable corrections along the way which occurs in any bull market, but knowing the main trend is the most important part of being successful when it comes to the markets. Shorting this bull market consistently has been a tough game to play vs just going with the bull market. All the best…Rambus

HUI Update…Bear Market Rallies

Just a quick update on the weekly chart for the HUI which shows the blue shaded areas are all the same percent bear market rallies. The last time we looked at this chart the HUI had just rallied back up to the top of the blue shaded area at #6. What we needed to see happen is for the HUI to rally no higher than the top, which it came close. If you look at all the other bear market rallies none ever went higher that the preceding one. The only time the price action went higher than the preceding bear market rally high was at the low at #5 which was the biggest rally of the bear market. If this bear market rally plays out similar to all the other ones we should see lower prices ahead.

Weekend Report : Uranium: Waiting in the Wings for Tomorrow’s Bull Market

Great News

Plunger has accepted an offer from Sir Rambus to do some of the Weekend Reports.

Who is Plunger >?  See his bio at the end of the Post.

Fullgoldcrown

……………………………………………………………..

This weekend I would like to take a look at uranium to see if its ready for prime time, but first I thought it appropriate to review the Big Trade- “Plungers Trade of the Year”, in light of this past week’s fireworks. After the Big Trade let’s take a quick look at NATGAS, the PM sector then move onto uranium.

It ain’t bragging if it’s true- Will Rogers

Last weekend I published Plunger’s Big Trade in a 3-part series. Part III which introduced the oil short trade was published just as the market opened on Monday. So anyone following the post had the logic of the trade and enough time to think about it to take a position when the final idea was published. It turned out timely as the market immediately started to move in the direction of the trade. Below is a summary of the vehicles I used to execute the trade and its one week after published returns:

UWT- short- 26.1%
DWT- long – 24.0%
SCO July 17 30 -call- 61.4%
USO Jan 18 7 -Bear call spread- 17.6%

This is the 5-day return for the vehicles I used for the trade. It’s my view that this move has much further to go. So we are in a good position for further gains. Be Right-Sit Tight.

So here is my next forecast….No I will even make it a guarantee:

I will never have a more timely, first week higher return idea going forward in any future market recommendations. So there you have it, its all downhill from here knights. The best is upon us and future recommendations will never live up to this one!

The Big Trade

Here is the weeks action. As I said it doesn’t get any better than this…. Note we got short just above the NL prior to the fall. I rushed this thing into publication because one could see this coming. Once the NL got violated it took until the next day to do its BT so there was plenty of time to reconsider and get into position. On Day #3 the deluge began.
As I mentioned in the original report don’t dismiss the small percentage moves we are talking about here as leveraged instruments generated large end moves.

Next we see the one year retracement and trade chart. Significantly we broke the 150 EMA to the downside. Price seems to be respecting resistance levels

Oil seems to be close to finishing up the initial move which may end at the bottom of the range. In the next chart we see how oil completed its measured move to the upside on the way up to resistance. The second chart shows the potential measured move objectives in DWT the inverse 3X ETF.

Now we look at the big move potential. Could oil fall all the way to the bottom and then some? Answer: Go back and read the report. The 3 Part Series can be found by clicking on the Last 100 on the sidebar here.

Below I speculate how it could take shape:

NATGAS- the other energy complex (the widow maker)

It appears NATGAS has finally succumbed to gravity and the prolonged incessant backtest may have finally completed. Throughout the week Rambus kept us updated on this and below I show my interpretation of the short term move. It’s consistent with Rambus’ view but its a different way to look at it. I see a diamond formation after the initial break out of the rising wedge. Also while still in the wedge it built out a Prominent H&S. I try not to see a H&S behind every bush, but this one was staring us in the face.

Here is the long term and intermediate picture and how the shorter view fits in:


The Gold Space.

I really prefer not to short the PM space because at heart I am a reformed Goldbug. But I have learned, and I have the scars to prove it, that its better to make money than hold onto a religious view. So if there is an obvious set-up, even if its bearish, I will take it. That’s what I saw over the past 2 months and posted at the Chartology Forum. So as the expression goes…”he saw his opportunity and he took it”. I was short the JNUG and the JNUG only. I preferred to short JNUG rather than buy JDST as it was to be a fairly long duration trade and wanted to align decay in my favor. It may cap my return (max 100%) but puts odds more in my favor. I have since covered the majority of the short and am somewhat agnostic. Overall I interpret the charts as bearish and I retain the short, but in smaller size. I prefer other opportunities such as Oil short, GAS short, CMG ( Chipotle) long.

Short JNUG was a great trade and remember respect those bear flags!

The chief reason I covered the majority of my JNUG short was I was expecting a back test up to the triangle as shown below. But no way would I go long, as take a look what a measured move to the downside would do. I am still bearish on the sector.


Here is the HUI….let’s just say it is sobering with that little red bear flag.

Finally, remember I stated that the CRB ( Commodity Index) was starting to give me the he-be jeebies?

Well take a look at this broad average and ask yourself what it portends? Keep in mind what happened to oil this week and that copper violated its NL also. And then there is that thing about the USD and how it has NOT broken down. Honestly the USD is the only signal we have not yet received that an unwind may be upon us. The USD is still in the process of consolidation and test. If it breaks out above in a move of strength we will know for sure commodities are headed lower. That’s the final signal.

Uranium-Building cause for its ultimate bull market

Silver stocks are the most volatile stocks on the Planet- Uranium stocks are the most volatile stocks in the Universe -Plunger

You may be familiar with the arguments for uranium: On-demand base load power in a world of flaky green, part time environmental solutions. And its true, nuclear power is an essential building block to our electrical power grid that’s available 24/7 rain or shine. But will we ever have a bull market? When will uranium’s time come? Its been locked in a 10-year brutal -90% bear market in the stocks. Is uranium terminal or is it one of the greatest investing opportunities…well….in the Universe?

I will argue it is a classic case of a non-substitutable power source poised to make you a fortune if you can play it right. After all uranium is probably the most hated, despised, out of favor investment class in the world. That’s right even more than dirty coal. Incidentally, without this industry 20% of America would sit in the dark in their unheated homes, wondering why they can’t charge their i-phones. If uranium prices, currently about $25/lb don’t increase to around $70/lb within 5 years , supply will dry up and the doomsday scenario above will actually happen. My bet is a higher price is the more likely outcome.

Name me an industry that has gone down 6 years in a row? Coal? Gold? …. go ahead I am waiting… That’s right the only one is Uranium. After 5-years the stocks in the coal and gold sectors rocketed in rallies greater than 100%. Uranium is past due simply on its statistical basis. But I will argue that its due for much more than a flash in the pan rally. Its statistically due for a bull market and the evidence points this way as well. So let’s review where we are:

We have a 6-year -90% plus equity bear market in an industry critical to maintaining our way of life which is also essential to our energy security. The uranium price is so depressed that it will require a near tripling of price to bring in new investment to develop production to fill the supply-demand gap which will exist 5 years down the road.

Stated differently, imagine after a 5-year gold bear market where the stocks were down 90% what would happen to stock prices if gold were to rise to $3,000 within 5-years. What percent gains could one expect in gold stocks after such a move? That’s the analogy that is appropriate and gives a sense of what may lie ahead. So let’s take a closer look at the dynamics in play then look at a few of the likely winners in the sector.

Uranium – The best risk-reward investment in our lifetimes

Pretty bold statement, but it’s the result of a 10-year secular bear market in an industry that is absolutely essential to our way of life. It’s a sure thing, but still misunderstood, thus why its so undervalued. It’s really just an issue of timing. I prefer a top down approach where we first study the history of an industry. Below is a chart of the uranium sector post WWII. We see both real and nominal uranium price and production levels of the industry. We can see how the two secular bull markets played out up until the current day.

Bull # I- Late 1940’s- 1950’s. This era was dominated by the nuclear arms race where there were few publicly traded companies. It was a defense build-up without nuclear power generation being much of a factor. But we can see the build up in productive capacity and the real price of uranium reach about $118 in todays inflation adjusted money. Note the 20-year bear market that followed.

Bull # II- 1970-79 This bull was driven by the concept of uranium as a substitute for oil. Uranium went from $3-42. An increase of a factor of 14X. Also note that price went to $170 inflation adjusted. This bull market finally ended, as most do, with new capacity production overwhelming supply. It didn’t help when Three Mile Island drove a spike through the heart of the sector. And just for good measure 6 years later Chernobyl finished the job by bringing the risks of the sector to the forefront. Yet, again new found supply led to another 20-year bear market in uranium. By 2000 price finally bottomed at $8 from the $42 nominal peak 20 years earlier ($170 peak CPI adjusted). These below cost prices finally led to production being curtailed and the start of the next bull market.

Bull # III- 2000-current. From 2000-2007 uranium increased from $8-over $100. Since then we have had a 10-year brutal bear market. It is my interpretation that this is a cyclical bear within the context of a secular bull market which began in 2000. It is essentially the same concept as the gold bull that started in 2000 as well. The run into 2008 was over played due to cheap credit allowing hedge funds to lever up the sector. The China narrative also led to overblown expectations. In 2008 hedge fund liquidation began as price broke down through $70 and after the crash the recovery was reversed by Fukushima and major mine shutdowns by Cameco. The current bear market I interpret as a severe bear within the context of a long wave secular bull market- but it sure is painful.

The Bull Case- Supply/Demand dynamics.

In the USA nuclear makes up 19% of electrical power. In a world of shrinking coal, nuclear becomes essential. So one can see the energy mix relies heavily on uranium. It’s not going away.

But what is really shocking is that 50% of that uranium comes from Russian controlled sources. Even more revealing is that the US only produces 5% of what it consumes. The easy fix for this of just getting more from Canada is not possible since Canadian production is tied up by long term contracts with India and China. So the supply sourcing issue is a problem. The Russians have cornered the market, its a building crisis, and getting worse.

The Cost Curve

Average cost of production is considered $65/lb. Market price $20-25. The market is responding by cutting back on production, just as it did in the year 2000 which kicked off the next bull market. Kazakhstan, which produces 41% of world supply is cutting 10% thus taking 4% world production off the market while Cameco is cutting 20%, removing another 4% off the market. These suppliers realize they can’t make up for losses through volume. So at this point in the cycle after the commodity has dropped 80% and the stocks 90% the lowest cost producers are cutting back production and the number of companies in the sector has gone from 500 to 40.

Production & Supply /Demand

The below chart shows production and supply. It shows the market being over supplied until the year 2021. Note also that without secondary supply (weapons blending, Sovereign dumping) we would already be in a supply deficit situation.

The next chart shows where the market sits without secondary production. So ask yourself this, how long would it take for the market to react to an announcement of a secondary supply policy change? The analogy would be if world oil supply was 15% less than demand and it was made-up through withdrawals from the strategic petroleum reserve what would happen if one day the government announced it was to cease withdrawals. What would happen to oil that day? It’s really the same story.

China Smog Story

No doubt you have heard about it, but until you have been there you really can’t experience the visceral disgust of what China has done to its air. (Our air) When one literally cannot see one city block due to the oppressive smog one realizes the policy of China growth at any cost has gone too far. China realizes this too and is now determined to fix it. A core tenant to the fix is nuclear power.

Future Demand

World electrical demand should increase 2-3% per year until 2030. Much of this demand is slated to be met through the building of nuclear power plants. Presently there are 450 plants in the world. 60 are under construction with another 168-233 under planning and development. Simply stated, supply must vastly increase to power this plan and the uranium price must significantly increase to encourage this new supply. The Japan shutdown will eventually bring 42 of its 54 reactors back into operation so its permanent impact will be relatively insignificant.

Utilities Purchasing Cycle

Legacy contracts are now beginning to expire. Utilities are 20% un-supplied for the year 2020 and 40% un-supplied for 2025. Typically utilities acquire stockpiles and like to have their contracts settled 3-4 years ahead of delivery. This is necessary to insure their supply pipeline is not interrupted. But here is the thing, investment to develop new supply will not be coaxed into the industry without a uranium price over approximately $80. That’s where the picture of citizens sitting in the dark with dead i-phones come in. It’s not likely going to happen, therefore the uranium price goes up.

The Uranium Wild Card

The case for a bull market in uranium is essentially built into the cake. It’s just a question of the timing. But there is a wild card factor that could turn this bull into the equivalent of a power ball win. That’s the case of the uranium geopolitical wild card.

Russia controls 65% of world production, and 45% of enrichment. The USA consumes 50 million pounds a year, yet only produces 3m lbs. It imports 95% of its consumption and we mentioned all current supply is already contracted for. The USA is totally dependent on outside sources for its energy security.

Russia owns the uranium chessboard and we are playing chess with the most accomplished chess master in the world, V Putin. Ask yourself how has the trend of international relations been going for the past few years? George “W” was right when he said he looked into Putin’s eyes and saw his soul, its just he saw the ruse. Now we see the Russian nationalist that he is and in his world Russia comes first at all costs. Maybe you ought to start hedging your bets and start right now taking a position in the future of energy production be it uranium, wind or solar.

When one considers that the entire market cap of all the US producing uranium companies is less than the market cap of Shake Shack, just maybe there is a bargain out there for forward thinking investors.

Patience is the key.

So the future bull is pretty easy to see, but as I said its just a matter of timing. Since its such a volatile sector it can be pretty painful to ride the ups and downs. So are we there yet? I don’t really know, but I do know each day the risk reward improves. When do markets start discounting the favorable conditions? 6-months, 1-year…5-years? Again, don’t know so we revert to what Mr. Weinstein has to say. Best I can do is to apply his method. Last autumn may have very well been the bottom, but I would not pile in right now as the sector is in a somewhat precarious position. Last week many stocks dipped slightly below their 30 W EMA. It’s a bit touch and go actually. Take your time as we may just still be in stage 1 of a bottoming process. Before we can have more confidence we need to see a sector backtest to the 30 EMA and then for the average to start moving up. We are not there yet.

In Part II I will do analysis on our top uranium picks….Be sure not to miss it!

Editor’s Note:

Rambus has asked Plunger to become a regular contributor at Rambus Chartology.

https://rambus1.com/

Members will now have Two of the best analysts on the Planet (Universe ?) for the price of One .

Welcome to Rambus Chartology Sir Plunger

Plunger’s Bio (at Talk Markets)

http://www.talkmarkets.com/contributor/Plunger#

 

Late Friday Night Charts…The HUI and Nothing But the HUI

As you know reverse symmetry plays a key role on how I sometimes interpret chart patterns or impulse moves. Below is the 60 minute chart for the HUI which shows the bearish rising wedge with the small H&S top that showed itself yesterday. After gapping down below the neckline and the bottom rail of the rising wedge some type of backtest should be anticipated, but not always. As you can see both necklines are taken from inside the bearish rising wedge to create the right shoulders, a form of reverse symmetry. A complete backtest to neckline #1 would come in around the 209 area if we get one. The next bit of confirmation will be when the price action breaks below neckline #2 which will create a bigger H&S top. Many times with a bearish rising wedge you will see the left shoulder and the head form inside the rising wedge while the backtest to the underside of the rising wedge forming the right shoulder.

Below is another 2 hour chart for the HUI which shows the H&S top that formed at the August 2016 high. After declining down to the December 2016 low the HUI then rallied back up to the February high where it completed another H&S top to reverse the direction down into the March low. From that low we got another counter trend rally back up to the April high which now looks like another H&S reversal pattern is building out. The potential black triangle that is building out shows you the battle taking place between the bulls and the bears. As the battle continues both sides become exhausted, but whichever trend was in place before the consolidation pattern started will normally reassert itself again. That’s the basic principal for bull and bear markets only on a much larger time frame.

The daily chart shows how the potential triangle is building out. The all important 4th reversal point won’t be complete until the price action hits the bottom rail. Next week I’ll be looking for a backtest to the bottom rail of the blue rising wedge. If the backtest holds resistance the next area to watch will be down to the bottom trendline. If everything works out and the HUI finally takes out the bottom rail of the triangle that will be the place where I will add another small position with the Kamikaze stocks. Keep in mind it may take several weeks or longer of chopping action before there is a resolution to the triangle either up or down so some patience will be required. Have a great weekend. All the best…Rambus

 

 

Wednesday Report…An In Depth Look at the Precious Metals Complex.

Before we look at tonight’s charts I would like to thank Sir Plunger for putting on the short oil trade this week while I was recovering from surgery. You won’t find a more through and in depth look at oil than what Sir Plunger offered. And wouldn’t you know it his timing as usual was impeccable. Oil dropped almost 4% today.

Now lets turn our attention to the sector which many members have a love hate relationship with.

There is a potential new pattern forming on some of the precious metals stock indexes which is only coming to light today. Before today’s price action there was only a guess of what may be forming with no confirmation. After today’s big gap breakout another piece of the puzzle is falling into place. Nothing is ever guaranteed when it comes to the markets, so all we can do is get the odds in our favor and try to recognize a potential pattern as soon as possible. Once you think you may have something figured out you then put together a game plan and work it until it either plays out or fails.

Lets start with the 60 minute chart for the GDX which shows the now completed bearish rising wedge. We got the H&S top which formed at the top of the rising wedge as the 4th reversal point making the rising wedge a consolidation pattern to the downside. It’s still possible we could see a backtest to the 24 area before the impulse leg down begins in earnest, but there are no guarantees. Note the inverse H&S bottom that formed in March which reversed the decline from the August 2016 high, a H&S at the bottom and a H&S at the top, both of which are reversal patterns.

This next chart is a one year look we were watching during the big impulse leg up out of the January 2016 low to the August 2016 high. Here you can see another H&S top which reversed the 2016 rally. After forming several smaller consolidation patterns the GDX bottomed out in December of 2016. That 2 month rally produced the first blue bearish rising wedge with the 200 day ma offering resistance. If you recall we went short on the backtest to the underside of the rising wedge until the Fed announcement, which spiked GDX higher at the beginning of our current and smaller blue rising wedge. Today we shorted the PM stock indexes again, as the price action is in a similar spot to the bigger blue bearish rising wedge.

During the formation or any consolidation pattern there needs to be at least 4 reversal points to make it valid. Sometimes there are 6, 8 or more reversal points before a consolidation pattern is finished building out. Many times a consolidation pattern can be created with several smaller patterns which shows the reversal points. With today’s breakout below the bottom rail of the smaller blue bearish rising wedge it puts a possible triangle consolidation pattern in play. Now you can see how a potential game plan may start to develop.

The first thing we’ll look for is a possible backtest to the underside of the blue rising wedge and then a fall away. Next we’ll need to see how the price action interacts with the bottom rail of the nearly 4 month black triangle consolidation pattern, which still needs to complete the 4th reversal point. One piece of the puzzle at a time, but as long as the game plan keeps playing out there is no need to change things.

The weekly chart for the GDX shows how the potential triangle consolidation pattern fits into the big picture.

Lets look at one more PM stock index to see how its price action is building out. The 60 minute chart for the HUI shows it broke out today below the bottom rail of its bearish rising wedge.

In a confirmed downtrend one needs to see lower lows and lower highs. This daily chart below shows the August 2016 high, followed by the Feb 2017 high, followed by our most recent high in April, all lower highs. As you can see there is still more work to be done in building out the black triangle, but as long as things keep following the script we need to let things play out.

Below is the $XAU and its potential black triangle consolidation pattern.

This weekly chart shows how the triangle consolidation pattern has built out just below the neckline, which has been holding resistance.

Below is the daily chart for the SIL which shows its downtrend channel firmly in place.

Lets change it up a bit and look at gold. If I had only one chart to use it would be this weekly chart which shows gold’s bear market downtrend channel. Since the first of the year I’ve been waiting patently for gold to rally back up to the top rail of the downtrend channel. I’ve been showing 1305 as the price objective for close to a year, which is now at hand. This is where the neckline and the top rail of the downtrend channel intersect. If gold can trade above that area then the bulls will be in charge.

Ironically enough SLV is also testing the top rail of its bear market downtrend channel. The top rail of the downtrend channel may also be part of the 6 point diamond consolidation pattern.

Below is a longer term weekly chart for SLV which shows the top rail of the downtrend channel holding resistance at the 6th reversal point in the blue diamond. To say this is a critical spot on this chart is an understatement.

If the HUI is going to show some bullish price action the first thing it will need to do is trade above the top rail of its major bear market downtrend channel

The same can be said for the GDX.

Below is the downtrend channel for the GDXJ.

This next chart is a ratio chart which compares the GDX to the SPX. When the ratio is falling GDX is under preforming the SPX. After another backtest to the neckline this week we could be seeing a potential triangle consolidation pattern building out.

Lets look at one last chart for tonight which is a weekly combo chart which has the US dollar on top and gold on the bottom. The brown rectangle shows the H&S bottom on the US dollar and the H&S top on gold. Both are at important inflection points at their respective trend channels.

The charts above show a game plan that will need to be followed. As long as the game plan continues to play out having some patience will be important. That is much easier said than done. There are usually a couple of times a year when one can get the intermediate term trend right and ride it for all its worth. Hopefully we are on the brink of such a move. All the best…Rambus