Monday, December 26, 2011

Cardero Resources (CDY): Bargain

I keep forgetting to update my purchase of AGQ (Silver Bull 2X ETF) on the open this past Monday morning at $46.72. Sorry about that.

My TSI Trading Record has been updated.

I anticipate purchasing shares of Cardero Resources (CDY) when post-Christmas NYSE trade resumes on Tuesday. 

Mining stocks, as you are well aware, are very out of favor right now. Indeed, the $BPGDM (Bullish Percent Gold Miners Index) that is available for examination at is at lows that should be close to a bottom.  At present it is reading just 13.79 - which is the percentage of mining stocks in the index with BUY signals on their point and figure charts.

Unfortunately, it's entirely possible that miners have not finished their wash out process - particularly as gold itself may have a final leg down to conclude this weekly cycle.

So, with a bit of caution in mind I decided to look at miners that looked as though they were not likely to have much, if any, downside left. While looking at over 200 charts I rediscovered an old friend - a company I have followed for a couple years now, know something about and have traded very successfully in the past. And that company is Cardero Resources (CDY).

Cardero trades on the AMEX exchange. Of all the charts I looked at, Cardero is currently priced closer its 2008 low than any other mining company one could take seriously. Additionally, of all the mining stocks on the AMEX, CDY trades at the lowest price to book value ratio of any - an incredible 57% of book value. Now that is a discount if I ever saw one.

CDY has a small float of just 91M shares outstanding - this figure includes a recently closed private placement of $7.6M.  And, the company has ZERO debt.

I'll offer some thoughts on 'why' Cardero is currently mispriced, but how about we take a look at some charts.

From a technical perspective CDY seems to have a few things going for it. First, what appears to be an inverted head &  shoulders pattern on the daily chart suggests a minimum price move of 57% could be in the offing. Additionally, the TSI would not need much encouragement to render a Trend Line Break BUY signal with an additional ZERO crossover BUY signal presumably not too far away.

This is a longer term look at CDY and its weekly chart.

We can see that the 2008 bargain basement low was $0.73 and recently CDY traded as low as $0.74. However, when investors have turned their back on this stock for too long, sharp rallies can quickly carry the stock up to $2, $3 and even $5. That is explosive.

Last chart - a daily of the Market Vector Coal ETF (KOL).

Here the inverted head & shoulders pattern is a little clearer to see than in the CDY specimen. Curiously enough, it also projects a minimum price gain in excess of 50%.

Is there something wrong with the Cardero company, some bad news, to explain its current bargain price?  NOPE.

There is a lot of background information that I am going to omit - I'm just not interested in spending 3 more hours reciting it all. If this stock interests you then by all means read all the SEC filings, commentary on Yahoo and Fool and tear through the company website (

Having done that for myself I conclude that the stock price is suppressed as it is in an extremely out of favor industry group - miners. On top of that, Cardero does not have a project that is already producing revenue. Further, the company, while having a major position in a coal mining operation, has it's financial resources spread out over several other smaller mining operations that include coal, but also iron, titanium, gold, silver, zinc. If that were not enough for analysts/investors to keep up with, CDY also owns stock in a couple of other mining companies (investments) that amounts to about 30% of their net worth.  Add to that December tax loss selling and the plate is full of (temporary) negatives. 

I believe that the investment community goes through periods where this company does not fit into some nice box and is periodically removed from their radar screens...... I believe that to be the case at the present time.

A couple of final observations. First, it is important to appreciate how Cardero got to where it is today. Seven years ago the company purchased the Pampa de Pongo iron ore deposit in Peru for $1M. 

Six years later they sold it for $100M.

And secondly, their coal mine operation just released a preliminary economic assessment. The project contemplates a net after tax and expenses profit of $115M per year after mining begins. 

Remember, CDY has ZERO debt, only 91M shares and sells at .57 Book Value. 


  1. John. I like to compare your analysis with my own to see where I am going wrong. You're making money. I'm not. In comparing KOL I see that your potential inverted H&S formation is part of a much larger potential H&S formation (not inverted) with a neckline in the $27 area. What is troubling to me is that the volume seems to support this larger H&S as being bearish. Also, I note that in the development of the potential right shoulder a bullish down slopping wedge can be discerned which supports the bullish scenario. Am I being too wary of that ominous big H&S? My analysis leads to my saying if it breaks 34 on the upside its a bull; if it breaks ~30.50 on the downside, it's a bear.

  2. Hi Loren - you have good eyes as I had not noticed the H&S (not inverted) on the KOL chart that began with a left shoulder in January 2011, a head in April and right shoulder in July.

    However, the neckline for that pattern would be the $43.50 area, which was broken to the downside on August 4th. At most, this pattern sported a $9 measurement from the neckline to the top of the head and projected a minimum drop of $9 from the neckline to around $34.

    Ultimately the pattern did yield the minimum projected fall of $9 and more. Price reached $27.42 on October 4th and amounted to a whopping $16 fall from the neckline.

    To my way of thinking this head & shoulders pattern has been dutifully completed and is no longer in play.

  3. Sorry, John. I should have been more specific. I am talking about the potential H&S pattern with the left shoulder from Sept. 2009 to May 2010, head from then to Oct. 2011 and right shoulder still in progress.

  4. Loren I'm looking at KOL daily and weekly charts, Sept. 2009 to May 2010 and Oct. 2011. I guess I just don't see the potential H&S with a right shoulder still in progress. Usually the shoulders are quite symmetrical with respect to the head. From Sept 2009 to a head at Oct. 2011 is a measurement of 13 months.... and 13 months after the head would then approximate Nov. 2012.

    Perhaps email me a chart with some notation on it to help me understand?

    Thanks, John

  5. John< what time frame are you looking at on KOL relative to the potential move to $52?

  6. Loren - thanks for emailing the KOL daily chart to me. Yes, I absolutely see what you are talking about - so much clearer on stockcharts to see the pattern than my use of freestockcharts or TOS.

    Well, I see a left shoulder and head 15 months apart - so perhaps as we are only 9 months to the right there is still another 6 months for that right shoulder to develop and peak.

    The more interesting thing that caught my eye was the relative similarity of KOL and the SPX. And I do indeed think it possible we get a colossal sized H&S in the SPX in the first half of 2012.

    I'm going to guess that how the miners behave in the first half of 2012 will be the final say. If they continue to languish within their megaphone consolidation pattern and the stock market begins to roll over then no doubt KOL and CDY will go down as well. On the other hand, I think it more likely that miners will follow gold higher and leave the stock market to suffer without them. But heck, it's just a hunch.

    BTW, gold is now on bar 40 of its four hour cycle and just made a new low reaching 1596. I hope by morning it will be clearer whether this little gold cycle has bottomed or rolling over into something much more ominous. So far this 40 bar's high was on bar 24 - so the cycle is right translated and that is somewhat comforting.

  7. New low on gold. I have the current 4 hr bar as number 44 since the last 4 hr cycle low. From your chart of these cycles I noticed they sometimes stretch into the 50's.

  8. Today I am driving from Dallas to Denver - and half way there now in Amarillo, TX. So yeah, took a peak at the 4 hour cycle for GC. The TSI has both a positive divergence and a trend line break buy signal now. The high was on bar 24 so anytime this cycle decides to stop - if by tomorrow morning - should be a right translated cycle. The thing I am not crazy about is the TSI is now around -0.40. That is not a safe place to be. The TSI could work its way up to ZERO then roll over and it would definitely be time to run (if it isn't already).

  9. Thanks for that feedback, John, and guidelines about the TSI. I have been tempted to buy here since it's possible (likely?) that gold has put in a 4 hr cycle low at bar 45. (However, if gold continues lower, it could be a LOT lower by bar 50 or 51, so I'm watching and waiting.)

    What chart are you looking at that give you those TSI values? On my 4 hr chart with TSI params of 7,4,5,EMA, I currently have a TSI value of -41 and change.

  10. just wanna give my 2 cents on the KOL chart, dont know about the long term, but near term seems to be more down on the way in the comming week, IMO, 23rd was the reversal point, the upside is limted.

    just learning and testing out my analysis.

  11. gold takes out the 12/15 low. Maybe we're still in the daily cycle that began at the 11/30 low? We're coming to the end of your timing band for the 4 hour cycles, on bar 51 as I write this.

    Are you considering a long position in gold or miners here?

  12. pima - the daily chart of gold is showing a favorable positive divergence BUY signal but today is only Day 9 of the daily cycle that averages 24 it is difficult to bet on an end of this just yet.

    And if 1535 is taken out then this now left translated cycle will also be a failed cycle. Our examples of this are 2004 and 2008 - and they were not pretty.

    The four hour cycle is left translated now and a failed cycle. Often this setup appears at the very end of the daily/weekly cycle - but I'll have to give it a closer look.

    I already have a big long position in miners. Will just hold while under water.

  13. John,

    Gold is on day 9 --IF-- you count the last daily cycle low as occurring on 12/15. But that was an unusually short daily cycle. If you don't count that low as the end of the prior cycle--the one that began with the 11/21 low--then today is day 27, still within the normal timing band for a low.

    Moreover, your 4 hr cycle count is on bar 15 at today's low.

    Seems like we're due for some kind of bounce here, whether it's just on the 4 hr chart and then rolls over (continuing the cycle that is 9 days old), or whether it's a larger bounce and a new daily cycle.

  14. my earlier post mentioned an 11/30 low. That was incorrect, should have said the 11/21 low.

  15. pima - it was daily low on 12/15. The volume was massive.

    John, I did not see if you exited the AGQ and NUGT. CDY pretty good today in the sell off - up 2.1%.

  16. Ivan - on my website you can see I have 50 or so miners listed with their price change on the left side of the webpage. Literally not a one was green today, well except CDY.....which I have a limit order to buy but the price has not been hit.

    I still own AGQ and NUGT and taking a beating at the moment, for sure. I'm also on vacation with my children in Colorado and not watching the market much. It's a bull market for the miners and for I have every intention of selling both positions at a nice gain.

  17. Ivan,

    My suggestion is to NOT treat the 12/15 low as a daily cycle low, and instead use the low of 11/21 as the last low. That puts us currently on day 26 or 27 of the current cycle (depending on whether you count Thanksgiving Day as one of the trading days). Normal daily cycles in gold run from 18 to 28 days (or 20 to 30 depending on who you ask), so if we are on day 26 or 27, we're within the timing band for a low and approaching the end of the timing band.

    Of course, the 12/15 low may turn out to be a legitimate cycle low, then this cycle is still very young and not likely to bottom for a while.

  18. John,

    when you did you research on the 40 bar cycles on the 4 hr chart, how far back in time did you go to confirm that that cycle is consistent?

    40 bars seemed to be the likely timing for this cycle, but as always, some cycles come up short and others extend. What were the most extreme you discovered on the short side and on the long side?

    Today's low was bar 55 on the 4 hr chart. That's pretty stretched, but the last one was short at only 28, so the two combined are just 83 bars very close to 2 X 40.

  19. pimaCanyon - all very good questions. TOS provides for a maximum of 180 bars look back on the 4 hour chart. That amounts to only about 9 calendar months - so that is all the further I was able to consider.

    Shortest: 28, 31, 31, 37, 38
    Longest: 57, 56, 55, 55, 50

    I have done some Fibonacci TIME study and found some interesting 50% relationships - such as the tendency for any two consecutive 4 hour cycles to be equal to either the two consecutive 4 hour cycles that preceded or followed it. Coincidentally this corroborates your observation of the most recent two 4 hour cycles being equal to 40 when added together then divided by 2.

  20. I'm counting the high of this 4 hour cycle as bar 24 and the bottom (assuming it holds) as bar 51.

  21. Oooooooops - sorry, I was not looking at a refreshed screen. I agree - 55 is the correct number (and not 51).

  22. John,

    Many thanks! That is great information!

    Wishing you and your a Happy New Year and may 2012 be your best yet, not only for your trading account but for you life in general!

  23. In CDY @.97. What part of CO are you visiting? Pikes Peak is in my backyard per say. Hope you're enjoy the above avg temps here.