The markets taketh away, the markets giveth.
On Tuesday, a negative article on Seeking Alpha appeared to make investors decide they didn’t like stock in mining company Uranium Energy Corp. (UEC) anymore to the tune of a 16.26-percent sell-off. Then, on Wednesday, they appeared to come to the conclusion that their initial decision was a bad one to the tune of a 16.50-percent gain.
All told, the damage for the two days comes to 2.44 percent, but with a significant dip in between. Uranium Energy Corp. has been in a bit of a freefall since the start of March, losing almost 35 percent since that point and crashing past an important technical barrier when it broke a support level of $1.60 a share in mid-March.
The Seeking Alpha article that appears to have sparked the action for the small-cap mining company came from user Itinerant, a self-described engineer with a focus on investing in the resource space. Itinerant observed that a recent restructuring of long-term debt involved paying lenders interest in the form of stock, which could seriously dilute shareholders when all is said and done. He also observed that uranium production was scaled back and, even if it reached full capacity, wouldn’t be enough to sustain the company.
Uranium Energy has bought itself another half year of time by extending an existing debt arrangement,” Intinerant writes. “This extension has come at a high price and we doubt that the company will be able to repay the debt in two year's time.”
“Uranium production has been ramped down for the moment and even at full capacity from both the Palangana and the Goliad field and higher prices cash flow from operations is not sufficient to support ongoing expenses, let alone repay the debt.”
The article was released just before 1pm ET on April 8 and shares, which had been trading steadily between $1.22 and $1.25 all day quickly started to tank as volume rapidly ramped up. By market close, the stock had reached lows of $1 a share and was trading at $1.03.
However, it appears as though those buyers who didn’t buy the bears’ case were simply asleep at the switch yesterday. Uranium Energy Corp. opened the day down another penny a share and trended lower for the first half-hour of trading. However, after that it began a rapid rise on heavy volume, peaking at $1.22 a share and ultimately closing at $1.20, making back almost all of Tuesday’s losses.
A look at Uranium Energy’s chart and technical data would seem to indicate that this is a favored stock for technical traders as its behavior seems to be largely motivated by patterns and technical factors. Since crossing its 200-day SMA from above in mid-October, the stock has treated that level as resistance, bouncing off a 200-day SMA ceiling at the end of 2013, again in late January, and then a third time at the beginning of March.
However, while the 200-day SMA appeared to be capping gains, support at $1.60 also appeared to be limiting losses. But, when shares briefly touched $2 apiece in early March, a perfect storm of factors combined to push shares down and ultimately break past support.
First, the stock failed to break past its 200-day SMA for the third time in as many months. Secondly, the 200-day SMA was at the same level as a longer-term falling resistance line that dated back to late July when shares hit a 52-week high at $2.65.
The combination of these two factors along may have been enough to start a sell-off, as it would be clear to traders that the potential for the stock to go much higher would be limited. However, the final surge taking Uranium Energy to $2 a share also pushed the 14-day RSI up to 70.0, a barrier that typically indicates a stock is oversold and would be well known to any technical trader.
So, with all three of these factors converging, it may come as no big surprise that the resulting sell-off pushed Uranium Energy all the way down to $1.20 a share and well past support. However, those same technical factors could explain some of the strength of Wednesday’s bounce back. Uranium Energy had been trading with a 14-day RSI below 30 since late March, typically a sign a stock is oversold. Yesterday’s losses pushed that level all the way down to 20, potentially triggering buy signs for many traders.