Chart of the week: What to do with a share that's tripled

Has Fresnillo made its high for 2016?

Last week, I restated my query: Has Randgold made its high for 2016? Today, I am asking the same question of Fresnillo.

On 18 July, I noted that my target for Fresnillo at £20 had been hit a few days before from my initial buy at the £7 area in February. Because the ascent had been extremely rapid when investors suddenly flocked to the shares as silver 'unexpectedly' rallied, I noted that this presented a great opportunity to take profits off the table.

This was the weekly chart showing my best guess in July:

In fact, the bull run was a typical reaction to the multi-year wedge that had formed since 2013 with very clear and accurate ('pink') lines of support and resistance. It is as if the market was acting like a coiled spring winding tighter and tighter until it snapped and all resistance gave way to produce the almost vertical rise.

This chart will surely go down in the annals of chart reading history as a superb example of how a simple observation of the wedge pattern gave all the information needed to extract massive profits in a very short time scale.

No tedious examination of the company accounts was required, nor a detailed study of the supply/demand situation in silver - both of which are always distractions from making good decisions.

Not only that, but a little more chart reading offered me a likely target at the £20 area. So a few minutes spent on the charts gave me the entry, the correct direction and the target for profits. Is there another system or methodology out there that can do all of that with a high degree of accuracy with a few minutes' study? If so, I haven't found it.

Remember, my initial analysis was carried out in the teeth of a huge bearish consensus where the vast majority of market pros were shunning precious metals and the miners.

In the above July chart, I had forecast a dip in wave 4 - but has it occurred? Here is the updated daily chart:

The initial signs are excellent. The decline off the £20 high is in an a-b-c pattern, which is typical in fourth waves. The question is this: has wave 4 found its low and will the market now turn back up?

In the background is the silver price, which suffered a setback late last week as shares in general were hit hard with the Dow losing 400 points on Friday. In recent days, the number of bullish bets on silver by speculators compared with the bearish bets has been running at a record high. This is not a bullish sign.

I have noted before that when speculators amass a lop-sided position either bullish (long futures) or bearish (short futures), a major turn is never far away. That fact has made me dubious of further bullish action - at least near-term. I sense the headwinds against silver and Fresnillo are getting stronger.

So here is an alternative scenario:

To rid the market of the extreme bullish sentiment, the market will need to decline further to one of my targets. A typical retracement is the Fibonacci 62% level which lies at the £12 area. If this occurs and a trader/investor is still holding a full long position, that would be a devastating loss of potential profit. And it may not stop there, of course.

And that little scenario painting is why I always advocate taking at least partial profits off the table as targets are hit - in this case, the decision to do so at £20 in July looks pretty good now, doesn't it?

The financial world is littered with investors who rode a share up the mountain only to see it fall down the other side. Of course, most traders/investors feel more bullish as prices rise. That is perfectly natural. You quietly (or not so quietly) congratulate yourself for being so smart in seeing the opportunity - and acting on it.

And the greater the gains, the more confident you become of further gains. In the case of Fresnillo, you saw the astounding vertical rise - and set your targets higher. But this is a big mistake.

To capture the profit from this scenario, you need to train yourself to become more bearish as prices rise. That way, you do not get carried away in the ecstatic emotions of the herd who have now joined you. Yes, you are now part of the bullish herd - and you probably devour all of the bullish articles that forecast higher prices.

And as we know, when the bulls become too numerous, a major turn down cannot be far away. That is what we are seeing with Fresnillo this month.

I am launching my new VIP PRO SHARE SERVICE later this month which will highlight promising setups for both spread betters and longer-term investors. Details soon.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.