New Position Initiated - ZN.V (Zinccorp) February 09th, 2011

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for February 9th, 2011.

Every once in a while you come across a story that literally gets better and better the more you dig into it. Today we have to fortunate opportunity to learn of just such a story (have I got your attention, yet?). Here it goes...

The company specifically is, Zinccorp Resources (ZN.V). Currently CRI has been accumulating at or near $.16. The market is actually lower then where I bought it, but for disclosure purposes that is where I am long. And after we do the analysis, you will understand why I am ok with that cost.

Fundamental background

Zinccorp, like so many of the junior resource sector, is completely reliant on financing and more specifically flow-through financing (to learn more about why flow-through financing is so important to the Canadian Resource sector, I suggest you go here: link) to fund operations. Since we know the market is reluctant to finance companies with large share counts, we can make our lives much easier if we focus on resource related companies with low share counts. With this in mind, ZN has a total of 18 million shares outstanding (relatively low - keep in mind our VCIM model looks for stocks with less than 20-25 million shares out). As rediculous value hunters, we hate to pay more than book value for an asset. Ideally we would like to pay a fraction of book value for assets (to learn more about why book value is a good measure for the actual value of a company, I suggest you go here: link).ZN currently is trading at .50 tangible book value per share. This literally means for every dollar you spend in the market, you are buying two dollars worth of company.....HELLO!

So lets dig a little deeper shall we. The company describes itself as "a member of the Hughes Exploration Group of companies. A recently formed, tightly held junior mineral exploration company. The Company had a zinc/lead/silver discovery on the Michelle Property, one of its four highly prospective properties in Yukon, Canada in 2007, 2008 and again in 2009. Zinccorp has recently expanded its exploration profile into the prolific Timmins / Larder Lake mining camp adding a new gold dimension to its exploration portfolio." (company website). Frankly, I was not impressed when I went to the site. It is poorly laid out and way out of date. And this may be one big reason why the stock is so un-followed (if that is a word?!?) and trading at such a huge discount. In this modern day and age, you gotta be up to speed or you will be left behind. Having said that, this to me represent a potential opportunity. The company is trading at .5 time price to book so they must have something. Indeed, they do have two signficiant plays going. 100% interest in the Michelle Project in north-central Yukon Territory (zinc, lead, silver and gallium...news link) and 100% interest in newly acquired Timmins / Larder Lake property (news link). Something doesn't make sense here, right? When in doubt I always pick up the phone and so that is exactly what I did. I was very fortunate to be able to get a hold of a company executive and have a nice chat (he shall remain anonymous for this post). It turns out that yes both properties are going well and plans for a 2011 exploration budget and exploration calendar are being put together. Additionally, he told me that the company is drilling on the Timmins property as we speak. WHAT?!? I asked him why the TSX for example didn't have the news and he said that the person handling the IR left the company at the end of the year and hasn't been replaced. Can you believe that!?! If you can't please feel free to call the company yourself and do your own DD (Telephone: 604-685-2222).

So here is a poorly followed company with horrible IR. They are trading at .5 times price to book and only have 18 million shares outstanding. The last question that needed to be answered was where were the insiders of the company long? To answer this I had to do some serious digging. It turns out that way back in July 2008 (when the Yukon deposit was first discovered) the company granted 3 million options to directors at $.15 good through 2013 (news link). BINGO!

Technical picture

The technical picture is almost as compelling as the fundamental; here then are the daily and weekly charts for ZN (since the stock is poorly followed Stockcharts.com won't even carry it so I have included the basic TSX charts (link).

The daily chart has yet to bottom in earnest so any buying right now is 'dipping our toes' kind of buying. Having said that, the current 1 year 50% level is $.325 and the three year 50% level is currently near $1.33. This literally means that if we buy the stock for less than $.1625 we can realistically expect a double at our initial target. Once we have some free stock we can shoot for the $1.33 as our ultimate target. 

Summary

With the above mentioned in mind I feel like this company is extremely undervalued and can realistically double from current levels. The stock has not put in a technical bottom so I am not looking for it to take off tomorrow. Considering the low share count, the fact that the company is drilling and we are heading into a seasonally very friendly time for the stock market, I have gone ahead and 'dipped my toe' at $.16. Upon a respectable double bottom (our classic W pattern) I will add to the position. Hopefully that will still be below $.16 but one can never know for sure.

So the question for your is how do you read the next line:

opportunityisnowhere

Since you are a subscriber, I think we know the answer....

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - RIP.V (Ripper Oil & Gas) January 13th, 2011

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for January 13th, 2011.

When running our weekly VCIM screens we sometimes come across some not so ordinary situations. And while one of the primary criteria of the model is 'rolled-back' stock, that doesn't mean we won't take a real good look at an on-going concern with less than 20 million shares outstanding. Indeed, today's purchase is along these more abstract lines. Once we delve into the fundamentals, I think you will see why CRI thinks this little company is rather compelling at these levels.

The company specifically is, Ripper Oil & Gas (RIP.V). Currently CRI has been accumulating at or near $.13.

Fundamental Background:
RIP is in the Cdn oil & gas business with several properties across western Canada. Previously, the company was heavily tilted towards gas rather than oil. The company has been in the process (over the past two years) of divesting many of its natural gas assets. So much so, that now the company is basically 50/50 Oil/Gas.

What is most interesting is how they went about it. The company recently announced they has closed the sale of a substantial portion of their natural gas assets, coal bed methane assets to be exact (news link) for a little more than $13,000,000. Through the sale, the company was able to strategically reposition itself as a 50/50 producer and pay off all its debts. At the same time, the company distributed a portion of the cash to shareholders in the form of a dividend. Lastly, because of the dividend the company canceled 450,000 options to directors (new link) suggesting there is little stock overhanging the market.

Once all the dust settled the market has been left with a very interesting little company. Currently RIP is trading at an incredible discount of 0.189 price to tangible book value. Their latest quarterly report details the fact that the company has a number of producing assets and over $700,000 in cash (news link). And since they company still has only 20 million shares outstanding, any property aquired with that money could be subject to flow-through financing down the road.

So a producing asset with cash in the bank and trading at a huge discount to book value, sounds interesting to say the least. Now lets go take a look at the technical picture

Technical Backgrownd:
5 year price chart

RIP has been heading down for quite some time. The stock topped in 2004 just above $2.00/share when natural gas was all the rage. As natural gas prices have steadily fallen, so too has RIP's stock price. While I am reticent about declaring an official 'bottom', it is interesting to note that the stock did origionally bottom near $.11 back in 2009. After an almost 6 fold increase (up to $.60) the stock sold off on the recent dividend payout back down to the $.11 area. Considering the substantial book value of the company and the fact there are so few shares outstanding, I wouldn't be surprised if $.11 is a floor once again. So if we can see some sort of daily bottom come in over the coming days/weeks - from a weekly perspective we could easily see this stock rally first back to the $.60 area (test those recent highs) and then ultimatly to the 5 year 50% level at or near $1.00.

6 month price chart

Taking a little closer look at RIP we can clearly see the negative impact the dividend had on the stock price. But interesting here, momentum and money flow have moved up since the initial collapse even though price hasn't. Here too, we see that a 50% retracement of the horrific fall would bring price have up into the $.35 which happens to be more than double current prices. Because of this fact CRI has gone ahead a bought a small position in RIP to get started. A move above $.15 would register a double bottom buy price pattern and shall be my trigger to add to the position.

Once filled I will immediately place an open order to sell half of the position at double the purchase price (in this case at or near $.30).

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - JOR.V (Jourdan Resources Inc.) December 30th, 2010

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for December 30th, 2010.

This stock came to CRI's attention lately from a desire to take a position in the 'rare-earths' metals market. The fact that there are many suggesting there is a bubble forming in the rare earth metals market to this investor suggests that to the contrary, there is plenty more room for appreciation. Couple this un-euphoric investment atmosphere with an insatiable consumer demand/appetite for Lithium as an alternative power source and with what appears to be a growing political chess piece and you have the makings for a serious supply squeeze at some point down the road.

The real trick with these types of investments however is to be constantly hunting for signs of value as once these markets get going in earnest, the concept of 'value' quickly disappears.

With the above in mind, we come to CRI's latest acquisition, Jourdan Resources Inc. (JOR.V).

While doing a recent VCIM screen, JOR quickly jumped out as a potential candidate. The stock was the subject of a 4:1 roll back in October (news link). The stock currently has 19.5 million shares outstanding and is trading at .94 price to tangible book value per share. Their assets are 100% owned exploration rights to uranium and rare earth metal properties in and around Quebec (web site). First Gold recently discovered a major rare-earth deposit in the area and Jourdan happens to have staked the property right besides them. While this is no guarantee of finding anything, they often say the best place to look for a mine, is right beside another one.

While I don't expect the moon, a typically healthy stock can trade up to 3 times book value or in this company's case, close to $.40 per share. So what is going to get the company there? In Canada, we have government sponsored exploration tax credits that must be used on an annual basis (known as Flow-through financings). While too complicated to get into in depth here, just take away for this that there must be work done on a Canadian property, in the subsequent calendar year, in order to qualify for the tax credit. To this end, the company recently raised a little more than 1 million dollars (through a flow-through financing) that must be spent directly on their Canadian properties. The company has indeed stated that there will be major work done on their Lithium property in the coming months (news link). Lots of catalysts..

With the rollback now done and a significant financing taken care of, this company is currently in the best position an exploration company could be in. They have to property, they have the cash and they have a year to do something. In essence, this is a new stock that is trading at a discount to the actual assets of the company just waiting for any good news to 'pop'.
  
3 month price chart

 

A look at the past three month's price action in Jourdan suggest that the stock has cleaned itself up and establishing a base. Considering the substantial financing recently announced at $.15 and $.20 (flow-through) it is understandable why this stock would be putting in a 'floor' in and around these levels. Additionally, a 50% retracement of the substantial rally in October would have brought prices back into the $15 area. That has happened and one might argue that while the correction has taken place, the stock has been under accumulation.

3 year weekly chart

While not as compelling as the daily chart, there are a few interesting things oing on here too. Firstly, a 50% retracemtent of the 2010 bear run would bring prices back up into the $.22 area (or 37% higher than current levels). While not a double, the mere presence of this fact suggests the stock has the proverbial wind at its back rather than in its face. Additionally, while not yet confirmed, a trade above the fall highs would imply a bull flag formation while would imply a price target near $.28 (or 75% higher than current levels). Lastly, it is worth mentioning that at current levels there appears to be a base forming from a volume perspective and momentum (while not trending higher) is no longer overbought.

Summary
As both an industrial and political component , rare earth metals (and in particular Lithium) are still very much in the world's spotlight. Jourdan is an example of a Canadian exploration company with Canadian rare earth metals properties (including Lithium) that will be doing work and producing news in the coming quarters. Technically, the stock has recently consolidated a substantial move higher seen through the fall. One might argue that through the consolidation the stock has been under accumulation. Considering too the seasonality of the market, a typical spring (May/June) top should produce healthy returns if aquired in and around current levels. As well, because of the recent financing at these levels, there ought to be a risk 'floor' established here until the hold period expires (April 1st, 2011).

CRI feels there is a good chance to double invested dollars at or near $16 and as a result is buying. Once filled, orders will be placed to sell half of the position at $.32 working on an open ticket...

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - BYM.V (Baymount Inc.) December 13th, 2010

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for December 13th, 2010.

The venture exchange keeps powering its way up to the Point & Figure target of 2600 area.

(stockchart.com P&F chart link)
My hunch is we will take at least the next six months to work our way up there. But hey, who's complaining. In fact, after two and a half years of almost no trading, penny stocks are back in vogue and we are going to take advantage of it.


CDNX Venture Capital Investment Model (VCIM) Trading Tip for December:


December is usually a great time to go shopping in the venture capital market. Why, you ask? One reason and one reason only, tax loss selling. This is the process where an investor sells a stock at a loss and is given a capital gains tax credit to use either now (to offset a capital gain elsewhere) or at some point in the future (to offset a capital gain at that time). Depending on jurisdiction, these capital losses can be carried forward for years so it is in an investors best interest to book a loss if capital recovery isn't realistic.

With most large cap stocks there is always a chance price will come back if earnings recover down the road. So while there is an element to tax loss selling here, it isn't as significant as elsewhere. By contrast, many venture capital stocks (that either didn't have earnings or never had any prospects for earnings) can go down and literally never come back. The way the market handles this situation is with the dreaded 'roll-back'. A consolidation of a stock is in essence the final defeat of a venture. Even the most conservative purchases prior to a roll-back can become disasters after.

This brings us back to December and tax loss selling. Those investors who had to endure a 'roll-back' over the course of the prior year have a lot of incentive to sell a stock & book the capital loss. Watching this kind of loss materialize is not only a financial blow but it can also be a psychological blow too. Investors will often want to get rid of dogs so they don't have to be reminded of their mistake and tax loss selling season was designed to do just that*. Out with the old, in with the new.

*Since they now have only a fraction of the number of shares they began with, their average cost on the position is usually much higher than current market prices. In essence, the stock will need to increase many fold just for them to get back to break-even. So, if they happen to have a capital gain tax liability (from the sale of an asset somewhere else) they can sell the remaining position (usually a small odd-lot) and offset the capital gain liability with the newly created capital loss. 
 

This brings us to CRI's latest acquisition: BYM.V (Baymount Inc.)

1 year price chart

3 year price chart

This company first came to CRI's attention when it announced an intended 'roll-back' of its stock in August, 2010 (news link). Indeed, the stock was rolled back on a 20:1 basis which at the time left a little more than 8 million shares outstanding. After the roll-back, and a further slide, the company now trades at a very paltry 0.34 times tangilbe book value per share. This literally means for every $.34 you spend, you are buying $1.00 worth of assets. What a discount!
So what does the company do?
Baymount is in the horse racing business and operates in Ontario, Canada. The company's primary development is its new Quinte Raceway and Slots (“QRS”) racino facility located in Belleville, Ontario.QRS will combine the entertainment of slot machines and dining with live horse racing. The company has received all necessary licenses and approvals for the project. The company recently brought in a development partner who, at closing, will have invested $4 million ($3 million invested to date) for a 50% stake in the QRS facility. QRS will be the 18th and final racetrack and slots development in Ontario, which hosts one of the most successful slots-at-racetracks program in the world. The QRS facility is scheduled to open in Summer 2012. Additionally (an in similar fashion) they have the rights to build the new facilities for Wheat City, Manitoba (upon government concent) and they own the rights to proprietary software designed to help betters make more informed decisions. While I myself am not a gambler (I have way more fun in the market!) I can see how this company has quite a few assets behind it and is very well positioned going forward. Their 'philosophy [is] to create [an] entertainment destinations for consumers' (link) and I don't see how (with government and institutional backing) they can't do just that.

The $3 million dollar investment by the institution is an interesting deal in itself (news link). The company floated a convertible debenture. The conversion price is $.15/share and there is a proviso in the deal that says that if the company can get their stock above $.30 for 20 consecutive days, they can force the early conversion of the debenture into common stock. The deal has closed so it is not like this might happen......it has happened. This company now has $3 million dollars in working capital (to build the facility) almost no shares outstanding (5 million in float) and if they can move the stock into the $.30 area over the next 36 months they can literally wipe out the $3 million dollar debt.

What this means to purchasers at $.075 or better. The institution has basically said it wants in at $.15. If  the IR firm the company just hired (most recent news) and the regular street crowd can run the stock up to $.30 (and with only 5 million shares in the float, I don't see that being a big problem) then this is a win for everyone. We (CRI-ODNT people) can sell half our initial purchase at $.15 for a nice little double and look to sell more up top. The company gets the institutional debt off its books, the institution has a double on its books ($.15 to $.30) and I am sure a few brokers will make a very tidy sum.

Now can you see why CRI is so excited about this trade from the fundamental perspective?

Technically, it is very appealing too. Refering to the charts above, the company's 1 year 50% level is currently near $.23 [(high of $.40 + low $.07) / 2 = $0.235] and its 3 year 50% level is currently over a $1.00.. Purchases in and around $.08 would realize an almost 300% return if a move back to the 1 year 50% level materializes and and unbelievable 1350% should the market move back to the 3 year 50% level. However, there is NO BOTTOM in price yet. We are still very much bottom fishing here. Considering the companies plan is to open the new facility some time in 2012, I wouldn't be surprised to see the stock 'pop' on that event. Nonethless, 1350% for a little more than 24 months of work, seems worth the risk to me.

Of course, once a double bottom comes in then we can start to expect higher prices but that may be afurther down the road. My hunch, we get our normal seasonal rally into May-June and at that time we will see $.15 area if not higher. This would give us a double in about 6 months time, which would be perfectly fine by CRI.

Summary
Baymount Inc. represents really good value in the eyes of CRI.'s VCIM. The stock HAS NOT bottomed yet but CRI feels small initial purchases are warranted at this time considering the very low share count, the 'guarantee' of being in the government authorized gaming industry and the circumstances surrounding this year's tax loss selling. Once a serious bottom comes in we can start to expect to see upside objectives hit but for now consider it an accumulator. Indeed, that is what CRI has done to today and will continue to slowly do into the end of the year.

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - AGX.V (Amador Gold Corp.) December 10th, 2010

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for December 10th, 2010.

After two and a half years of utter carnage in the junior market, it is nice to see so much value once again. So continuing on the theme set forth in our 1st two weeks of Q3'10 report, we have found yet another junior resource name that looks to be trading at dirt cheap levels.

This brings us to CRI's latest acquisition: AGX.V (Amador Gold Corp.).

AGX.V 3 Months (chart 1)

AGX.V 2 years (chart 2)

Amador Gold (AGX.V) came to CRI's attention in the winter of 2010 when a friend bought some. The stock at the time was $.08 and we watched it drop to $.01 (boo). Once at $.01 there just wasn't anywhere else for this little one to go. The company could either de-list or roll the stock back (at the time there was over 200 million shares outstanding). While the company had an impressive array of gold/copper prospects (Rights and hard assets that total in the $100,000's if not millions) they had no cash to pay for exploration work and as a result, no future.

TSX-Venture Cap lesson for the day
The easy fix for this problem in the venture capital arena is to consolidate or 'roll-back' the company's stock. By doing this, a once un-finance-able company now becomes quite attractive to prospective investors as the per share value of a purchase can justify the risk. To this end, you will often hear of financing activities in and around a consolidation. As an additional sign of 'value', many indebted individuals will take shares in the consolidated company in forgiveness of their debt. Since the new stock is often trading at a substantial discount to cash, this action enriches the indebted while at the same time helping the balance sheet of the debtor. A final note here, many company's will re-instate stock-option plans or grant new options to directors at the rolled back price as again these levels represent a 'floor' on the stock.

(Back to the trade)


AGX announced in the middle of October that it was going to roll its stock back on a 17:1 basis (news link). At the time it was trading .01 bid / .02 offer. That meant that after the roll-back it would be .17 /.34. Additionally, the company did a financing upon the completion of the consolidation which gave them working capital. With a little over 15 million shares out and trading at a substantial discount to book value (even today at .245!) the stock was a buy, it was just a case of when the 'technical's' might come in.
So for that part of the equation we look at the charts.
Daily notes (chart 1 above)
1. Notice how on the daily chart above (chart 1) the low of $.17 (or $.01 on the old stock) has been tested on numerous occasions of late but not penetrated.
2. Notice the double bottom of late (through $.205). While the recent low did take out the Nov. low, it was on a momentum divergence and it did not break that .17 area.
3. Notice too that a 50% retracement of just this range brings prices back into the $.255 area.....where it seems to be headed in the near term.
Daily Summary
Ideally one would like to be long this stock at or near $.205 with stops just below the important $.17 level. Upside targets in the near term would be the 50% level at or near $.255, the gap at $.28, the October high at $.31, the roll-back high ($.02 on old stock) at $.34. This may take months, weeks, or days but there is something going on here and CRI wants to be long.
Weekly Notes (chart 2 above)
1. First and foremost, the 50% level is currently sitting at $.935!
2. The downtrend line and the significant lows of the summer of 2009 suggest there ought to be a lot of resistance at or near $.60
Weekly Summary
One can make an argument that this stock is still in its bottom forming stage. I has yet to break out in earnest but once it does there is a lot of upside potential. Indeed, from current levels there is a very high probability of doubling your money...

Summary.
AGX.V now represents what CRI would consider a rational investment idea. Fundamentally the company has a lot going for it. Technically the company has a lot going for it. CRI has stepped up to the plate and bought, as a subscriber maybe you should too...

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - WER.V (Weststar Resources Corp.) November 30th, 2010

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for November 30th, 2010.

After two and a half years of utter carnage in the junior market, it is nice to see so much value once again. So continuing on the theme set forth in our 1st two weeks of Q3'10 report, we have found yet another junior resource name that looks to be trading at dirt cheap levels.

This brings us to CRI's latest acquisition: WER.V (Weststar Resource Corp.).

Image 1.

Image 2.

This company came to CRI's attention a couple of months ago when it announced that it was consolidating its stock (12 old for 1 new share). That left a grand total of 6.8 million shares outstanding and a total market cap at a little over $1.5 million dollars. Additionally, the company announced that they were going to do a financing after the rollback (October 13th) to raise working capital. The company still retained a large portion of their previous asset base [including a recently acquired interest in the Rainy River Gold Claims (tsx news link)] and as a result of the rollback (and subsequent financing) was both trading at a huge discount to its' book value per share and now in a position to go explore. Indeed, upon the roll back announcement the stock broke out of a tight trading channel at $.24 and quickly ran up to on the closing of the financing. While I was not participating in the story yet, I was watching closely.

If one were to look at the price history of this company over the past few years (Image 1. above) we see that anyone who invested in this company over this period has been hurt. Indeed, a 50% retracement of this monster down move would bring prices back up into the $1 dollar area. We also see (in typical venture capital fashion) the final insult to old investors came in October '10 when all old shareholders were required to surrender their already depressed stock for even less. It is only after this final shock that the stock starts to move higher. Whatever previous sellers existed before the roll back now have had their positions reduced materially. This is probably the hardest part of the game for new investors to understand. Yes, stock prices move up and down but it only the shares outstanding that govern weather a company can raise capital for prospective ventures. Now, in the light of only 10 million shares outstanding, one can understand how this company's stock price can work its way back up to 50% levels.

That brings us to today. Currently (11/30) there are about 10.5 million shares outstanding of which about 4 million are 'locked up' until the hold period comes off (four months after closing of financing October 28th) or until the end of February. As previously mentioned, the company has retained a large portion of their previous asset base which means that even after the substantial run of the past two months, the stock is still trading at a substantial discount to its book value. Indeed, at $.355 the current book value per share is a paltry .68.Considering the very active mining market, the juicy gold property they picked up this summer and a substantial amount of cash on hand to do field work it would not surprise CRI to see this stock not only through the highs seen recently but well on its way towards the two year 50% level in the coming quarters.

If we look at the short term chart (Image 2 above) we can see the impressive double bottom breakout in price (through $.24) and the quick run up to $.54. Very slick traders bought the stock at $.25 and have already seen a double. Patient investors (who missed the original breakout) ought to have open orders working at $.24. More realistically, a 50% retracement of the most recent move would bring price back into the $.32 area [(.12+.54)/2 = .32]. It is with these two prices in mind that we will start to try and accumulate this stock. It is super thin so be patient and work your open orders. In case these recent lows are THE LOW, CRI has taken a small position at $.37 but will continue to add to the trade on weakness down to $.24. Should we get lucky and get all that we want. I will look to sell half the position on a double. Assuming we only get our stock in the mid to high .30's then I will be looking to sell half the position at or near $.75...

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

New Position Initiated - UNG April $6.00 Calls at $0.60, November 08th, 2010

Hello and welcome back to CRI's OnlyDoubles New Trades blog.

New trade for November 08th, 2010.

CRI's recently released TTA - First Two Weeks of Q4,'10 Report suggested that technology & commodities ought to do well for the quarter. With the recent run-up in certain commodities, value is getting hard to find. Not only have prices of base metals hit upside objectives, one might argue there is an asset bubble forming. I don't see this changing until the US Fed stops pumping money into the system but maybe we ought to be considering other commodities that don't have such dramatic downside risk.

That brings us to CRI's latest acquisition: UNG April '11, $6.00 Call Options. While most would consider natural gas a very risky asset, CRI might take the opposite opinion. Aside from the seasonally bullish backdrop and an expected unusually cold winter, one might consider natural gas 'cheap' too.

 

So aside from wanting to be long natural gas vs. oil itself, are there any other compeling reasons for us to want to buy natural gas?

Lets take a look at the UNG chart and see what it might be telling us...

 

This is a very interesting chart indeed. As one can clearly see, prices have fallen quite dramatically over the past year or two. But there a few little things that suggest that maybe the market has been a little too bearish on natural gas prices.

Some of these things include:

1. The current 1 year 50% level is more than $2 higher than current prices (that's more than 30%).

2. Momentum has actually been building not falling even though price is going down. This is known as a divergence and while it in itself isn't enough to buy, it suggests that the market is a lot stronger than what price is leading us to believe.

3. There is a double bottom in price that has broken the most recent four month downtrend line.

So as a technician, there is enough technically bullish criteria for me to seriously consider a trade. The question now is how to go about it. One could just go and buy the UNG (at the breakout near $5.85) and risk down to the recent lows ($5.20). There is a potential to make $2.22 on the trade (or about 38%) but there may be a way to do a little better. For this we turn to the options market.

Whenever I consider an options trade I always ask one simple question: Will the intrinsic value of the option (that being the market price minus the strike price) at our target be twice what the current premium is for a six month position. If the answer to this question is yes, then I can seriously consider the trade. For example, UNG's target is the 50% level ($8.075). Currently the six month (April, 2011) $6.00 Call option is currently trading at $0.60. If UNG goes to $8.00 some time over the next six months, this call option will have an intrinsic value of $2.00 (or more than twice what it is currently trading at).

So, for this trade, lets take that original risk money (5.85-5.20 = $.65) and lets go buy some call options with that. We will risk the whole $.65 and hold the options until expiry. At the same time, we will work an open order to sell half at $1.30 (double our purchase price)....Should we get near expiry and the sell order has not been filled we can either roll the position out to a late month or abandon the trade.... 

Remember, make sure the system you are using is at least 66% accurate and for heavens' sake, don't put more than 5% of your risk capital into any one play.

That's all for this post,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com