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Reader Mailbag: Buy Or Sell?

 May 23, 2012 12:04 PM

(By Greg Guenthner) If you add basic charting techniques to your fundamental toolbox, you will instantly improve your investing returns.

Finding support and resistance on a stock chart takes just a couple of minutes. You can make the annotations on your computer, or you can print out the charts and mark them with a pencil and ruler.

Three minutes of work can save you from making a mistake that would potentially cost you thousands of dollars.

Today, I'm going to make a few quick annotations to some of the charts you've sent in this week. I'll then tell you whether I would buy or sell the stock in question.

Let's get to it…

I purchased the Canadian stock Enerplus which is now down almost 50%…I know that natural gas is deeply depressed, probably resulting in the terrible drop of Enerplus. What I want to know is whether the stock has any possibility of recovering? Also, is it worth buying in more shares at this very depressed level?

[Related -12 Really Cheap Stocks With Extraordinary High Yields - Over 10%]

— M.J.

Here's a look at Enerplus Corp.(NYSE:ERF):

Sure, there's a possibility that the stock will recover — at some point. But at this point, it's important to get defensive. The market is falling, commodities are out of favor and this chart is terrifying. The breakdown in price accelerated in early April when ERF broke below horizontal support (blue line).

[Related -Prospect Capital (PSEC) Funds Recapitalization Of Valley Electric]

Also, I never recommend buying more shares just because a stock has dropped in price. It's a dangerous tactic that's more trouble than it's worth. Don't do it. The red line is resistance in this powerful downtrend. Even if the share price recovers to $16 from here, the downtrend remains in force. Yes, the stock is technically oversold. But it has been oversold since $21. It can easily move lower from here.

I'm thinking of buying 500 shares of Prospect Strategy Group (NASDAQ:PSEC). It's a BDC. I believe this is a strong buy for at least the next 24 months. Could you give me your advice on this stock?

— J.P.

Prospect Capital has held up well during the recent market turmoil:

The stock has consolidated just below $11 since late February. On the chart, you can see how PSEC has registered a series of higher lows, indicating that buyers are stepping in at higher and higher prices every time the stock dips.

I can see why you're interested in this stock. Judging by a quick look at the fundamentals, PSEC looks dirt cheap. It's trading right at book value, its multiple is less than seven and I see plenty of insider buying recently.

In this case, the technical can provide a solid backstop to your fundamental research. Buying shares between $10.50 and $11 is not a bad price for a longer-term timeframe (you mentioned a 2-year holding time). I would also look to add a stop loss between $10 and $10.25. Look for this stock to break out if it can close above $11.25 on strong relative volume.


Greg Guenthner
for The Penny Sleuth



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