Don’t plumb the depths with this mining stock

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Hi Lou,

I own some Northern Dynasty Minerals and would like your advice as to whether or not it is a wise idea to buy more in order to average down.

I value your opinion and look forward to your answer.

Anna in Montreal

Hey Anna,

Thanks for the assignment and the kind words. Both are greatly appreciated.

This will be the second time I undertake a study of Northern Dynasty Minerals Ltd. The last time was on June 17, 2011, on a request for my comments from Binh . The shares were trading at $8.30 and had given up a lot of ground from the all time high near $21.00 in February of 2011. The research conducted at the time indicated that the stock was in a downtrend and it was advised that taking profits off the table when available was always a good strategy. The best-case scenario outlined in the post was for the stock to hold support at $8.00 and build a base. If $8.00 failed to hold then a retest of $7.00 was sure to follow.

Unfortunately the shares failed to hold support at any level through 2011 and into 2012, hitting a 52-week low of $2.23 on Aug. 14, 2012. The stock caught a bounce off the lows and popped to $5.28 on Sept. 20, 2012, before dropping to its current level.

You asked if you should average down and I generally do not recommend it. You already have a position that is underwater. You would best be served not chasing bad money with good. Look for a lower-risk opportunity for the funds you have worked so hard to accumulate.

Another run at the charts will provide great depth to help you with your decision.

The three-year chart tells a tale of woe for investors who failed to sell and preserve capital. There are a number of patterns visible on the chart that identify NDM as a meat grinder. The established downtrend, the death cross that surfaced in March of 2011, and the resistance along the 50- and 200-day moving averages are all warning signs to avoid buying the stock.

The six-month chart is not providing much evidence that NDM is about to mount a new advance. There is what appears to be a double bottom that has formed but it is not enough to tip the scales towards a buy decision. The company has a long row to hoe in the development of their major copper gold property in Alaska. If you like the story, hold what you have but don't add more to your position.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it to lschizas@globeandmail.com.