This is a quick follow-up to my last post on Molycorp (MCP): “Molycorp Positioned for A Fresh Rally.”
Sometimes, you just can’t make this stuff up. MCP has now been trailing the 50-day moving average (DMA) for three weeks. Over the last three days, MCP has touched or crossed the 50DMA only to fall back below this trendline. These three days have robbed MCP of the follow-through I was looking for to confirm a fresh rally ahead for MCP.
An even more interesting pattern has emerged in the Bollinger Bands (BBs) which represent volatility in a stock. MCP’s BBs are tightening as the stock follows a tight range upward and volatility drops, also known as a “Bollinger squeeze.” The tightening of MCP’s BBs can be observed with the upper and lower bands converging toward the middle band (the 20DMA).
The old adage is that periods of low volatility lead to high volatility and vice versa. The Bollinger squeeze is a notable reduction in volatility that precedes a burst of higher volatility. MCP’s squeeze is confirming a major move, but I was betting on that next move being a rally. The last two squeezes, as seen in the chart below, produced a strong downward draft. Just in case this detour to a fresh rally occurs again, I have hedged my MCP position a little. Note that buying interest still dominates selling interest in recent action. I remain overall net long.
*Chart created using TeleChart
Be careful out there!
Full disclosure: long MCP