Stock Quotes in this Article: AU, LODE, PKX, SLW, VALE

BALTIMORE (Stockpickr) -- Gold. Silver. Steel. Copper. Rare earths. Whatever your favorite metal may be, chances are it’s been on a tear lately. And this fall, metals aren’t showing many signs of slowing down.

With the QE3 cash register churning to the tune of $40 billion a month, it shouldn’t come as a huge surprise that investors are starting to pay even more attention to commodities right now. But metals -- and the stocks that mine them, process them and sell them -- have been moving higher for most of 2012, scoring a slot as one of the top-gaining sectors this year.

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With so many metals stocks up so much, does it still make sense to be a buyer here? The short answer is yes.

The obvious element is QE3. With so much cash pouring into the money market, inflation is going to be a boon for commodity prices. But metals stocks also look strong now from a relative strength standpoint. And that could be just what it takes to drive home even bigger metals returns in the last quarter of the year.

That’s why we’re taking a technical look at five metals stocks you can trade for gains this fall.

For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

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So without further ado, let's take a look at five metals stocks worth buying now.
 

 

Posco

First up is Korean steel manufacturer Posco (PKX). It’s been a pretty unflattering year for Posco. Shares have been locked in a downtrend since February, moving from a possible test of triple-digit share prices all the way down to $75 this summer. But the rebound in metals looks to benefit this stock more than most thanks to a bullish pattern shaping up in shares.

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Right now, Posco is forming an ascending triangle bottom, a setup that’s formed by a horizontal resistance level to the upside (in PKX’s case at $86) and uptrending support below shares. Essentially, as PKX bounces in between those two technical price levels, it’s squeezing closer and closer to a breakout above that resistance level. When that happens, we’ve got our buy signal in PKX.

It’s important not to be early on this setup. $86 has acted as a sort of “ceiling” for shares the last handful of times that this stock tried to move through it, so while shares are testing a breakout now, they still could potentially bounce lower in the pattern.

Comstock Mining

Small-cap gold and silver company Comstock Mining (LODE) is forming a similar setup right now, albeit without starting off with a downtrend first. Comstock has been rallying hard since June, jumping more than 64% since the start of the summer. Despite the moves that LODE has already made, the triangle setup points to more upside.

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Like PKX, Comstock is forming an ascending triangle. The most notable difference is the fact that this pattern is coming in at the top of a rally rather than after slipping lower (LODE’s is a more textbook example of an ascending triangle). For this stock, the resistance level to watch is $3.20 and uptrending support has moved more or less in line with the 50-day moving average. Traders should take Monday’s breakout through $3.20 as a buy signal.

When looking at technical setups, I think it’s useful to think of them in real terms. For a triangle like LODE, the setup is being made by a glut of supply of shares above $3.20 (our resistance level) and increasing demand below to create the uptrend. Monday’s move higher means that all of the excess supply has been absorbed by increasingly eager buyers.

With that “ceiling” removed, traders who are willing to take on the added volatility of a true junior miner have a strong signal to go long.

AngloGold Ashanti

Going bigger -- much bigger -- takes us to AngloGold Ashanti (AU). Unlike PKX and LODE, AngloGold had been forming the bearish counterpart to the ascending triangle: the predictably named descending triangle. But the pattern never completed. Instead, QE3 pushed AU to break out of the downtrending resistance level that had been forcing shares closer and closer to $31 support.

That aborted bearish setup is as good as a bullish setup as far as I’m concerned.

The buy signal came earlier this month when shares broke out, but it’s still a buyable trade at this point. Momentum, measured by the 14-day moving average, has been trending higher since late April, when shares were still falling. The fact that the RSI line remains in an uptrend points to higher prices yet to come -- momentum, after all, is a leading indicator of price.

More gunshy traders can wait for the 200-day moving average to get broken for a second trigger signal.

Vale

$95 billion Brazilian metal miner Vale (VALE) is another name whose chart hasn’t been looking great for the past few months. Vale is down more than 13% on the year, bouncing lower in between downtrending resistance and support levels. But here again is a setup that’s actually bullish on further inspection.

That’s because Vale is forming a falling wedge, a reversal pattern that’s formed by downtrending support and resistance levels that are converging. The buy signal in a falling wedge comes on the breakout through resistance -- and with Vale testing resistance this month, that buy signal could be coming sooner rather than later. This is a pattern worth paying attention to. One study puts the pattern’s ability to spot a reversal at more than 90%.

Obviously, this isn’t a setup that you want to get in on early. The buy signal comes on a breakout above the resistance level above shares, but VALE could feasibly fall materially further and remain within the wedge before a breakout does happen. Until resistance gets taken out, keep this name on the back burner.

Silver Wheaton

Last up is silver miner Silver Wheaton (SLW). SLW has seen some pretty prodigious price swings over the course of 2012, rallying at the start of the year only to peak in late February and slide 32% over the next three months. But shares have rallied equally hard from June’s bottom in the broad market, making their way back up to finally test their tough resistance level at $40.

In broad terms, SLW is making a very long-term rounding bottom pattern, but I think that the pattern itself is less important than the price level that’s getting tested right now. Simply put, earlier this year, $40 was a price level above which sellers were far more eager to sell and take gains than buyers were to buy. If SLW can push through $40, it means that all of the weak handed sellers are out, and buyers have control back. That’s when you want to be a buyer.

This is another stock that’s looking good on a momentum front -- and that’s especially important here given the long-term nature of this setup. Despite the run that shares have had in the last couple of months, SLW’s RSI line hasn’t been broken. That means that prices are still moving higher at an increasing rate.

If you decide to take this trade, make sure you keep a tight protective stop.

To see this week’s trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

 

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At the time of publication, author had no positions in stocks mentioned.

 

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.