Yamana Gold, Pan American Silver Rally into Earnings

The breakout in gold and gold mining stocks comes just a few weeks after many of these markets were selling off and pulling back to new, short-term lows and technically oversold territory. But with earnings announcements in stocks like Yamana Gold (NYSE: AUY) and Pan American Silver (NYSE: PAAS) due on Wednesday, will the temptation to sell the news create the bargains buyers are hoping for?

Heading into Wednesday’s trading, both Yamana Gold and Pan American Silver are examples of the increasingly short-term overbought nature of the precious metals mining market. AUY was up nearly 4% on Tuesday, rallying to its highest closing level in two weeks, and finishing just outside of technically overbought territory. For its part, PAAS continues to trade in bear market territory, having slipped beneath its 200-day moving average in May 2011, but is up well over 2% ahead of trading on Wednesday, having closed higher for two out of the last three days.

With neutral ratings, both stocks have just begun to develop negative, short-term edges. Any strength on Wednesday likely will take both AUY and PAAS into technically overbought territory, with the potential for a significant ratings downgrade to our “consider avoiding” category. This category is reserved for those stocks that have rallied “too far, too fast” from a historical and statistical viewpoint, and are due for near-term underperformance.

As such, traders looking to potentially get exposure to these stocks may want to wait to see if current overbought conditions are resolved and worked off. Any gains over the next day or two could easily be reversed in a wave of short-term profit-taking – even if the overall trend in these markets remains upward.

In other words, higher prices, more overbought conditions and lower ratings now, could lead to lower prices, more oversold conditions and higher ratings later.

Traders looking for more immediate opportunities may want to consider the oversold conditions and positive, short-term edge of nearly one and a half percent in shares of Gold Fields Ltd. ADR (NYSE: GFI). Shares of GFI have closed lower for two consecutive sessions, four out of the last five, and are now trading just below their 200-day moving average.

Be sure to read our latest from 7 Stocks You Need to Know: “Buying the Selling in Weight Watchers”.

David Penn is Editor in Chief of TradingMarkets.com