A truck winds its way out of the Canadian First Quantum Frontier mine in Fungurume, in southern Democratic Republic of Congo on May 25, 2010.KATRINA MANSON/Reuters
Hi Lou: I hold 500 shares of First Quantum and was wondering if I should average down since I am in a loss position at the moment. Please advise if this is advisable at this time. The stock is currently trading near $18 and I purchased at $22.25. Thanking you and awaiting your reply. Anna in Montreal
Thanks for the assignment. I last conducted a study of First Quantum Minerals Ltd. on April 19, 2010. The shares were split 5 for 1 in August, 2011, and all the prices cited in this study are split adjusted. The shares were trading at $15.75 and Smita had a number of questions related to the political environment in Congo, the state of the housing market in China with implied consequences for copper prices, and if FM could be a takeover target. My assessment of the request was that Smita, like many investors, had too many planes circling the airport and not enough controllers for the traffic. It was advised that the best proxy for all those questions was the price of the stock. In the price there is much knowledge. The price of a stock incorporates all the information into one indicator so it is worth mastering what is revealed by the charts.
The research conducted at the time indicated the uptrend line had been broken and the momentum indicators were not signalling a reversal of the downtrend. Retrospectively, the risk-averse call was the right one as the stock continued to retreat until it caught a bounce off of $10.89 in June, 2010. From there it ran to an all-time high of $27.11 in late June, 2011. Since then the shares have been operating under a downtrend.
You asked if I would advise averaging down on your loss position. I don't generally recommend it. It would be better to diversify your holdings with another pick that could possibly help mitigate your loss. An investigation of the charts will inform my opinion of First Quantum.
The three-year chart for copper provides a good example of what to expect for a company that produces copper. As goes the price of copper, so goes the price of copper producers. Clearly copper has been in a downtrend for over two years and has recently caught a bounce off of $3.
The three-year chart for First Quantum has followed the downtrend for copper over the same time period. The shares have caught a bounce off of its 52-week low on June 24, moving up from $14.22 to its current price of $18.96 where it is now meeting resistance along the 200-day moving average.
The six-month chart provides a close-up of the MACD and the RSI as they signalled the advance in June. The RSI indicated the stock was moving out of an oversold position while the MACD generated a buy signal in June as the stock moved through $15. At the current time the shares are meeting resistance along the 200-day moving average while the momentum indicators are showing that investors should expect selling pressure.
Make it a profitable day and happy capitalism!
Lou Schizas