http://www.moneymorning.com.au/20080606/european-gas.html6 June...

http://www.moneymorning.com.au/20080606/european-gas.html

6 June 2008
Smart Money Piles into European Gas

Do you ever hear about a tiny mining stock jumping 20% in a day, or 50% in a week and wish you knew it was going to happen? Well, those stocks usually throw off clues before they boom. Here’s an example.

European Gas Limited (ASX:EPG) is a hydrocarbon producer/developer/explorer with projects in Western Europe.

The principal strategy of the company is to develop Coal Bed Methane and Coal Mine Methane projects, in particular, in France where the company holds a significant competitive advantage with major holdings under license.

The stock took off in late 2005, galloping away from 10 cents before taking a rest at 68 cents 3 months later. After a correction during the second quarter of 2006, the stock rose again until July 2007 (historical high of $1.19), and has been declining since.



But it just did something we liked.

Two days ago, EPG tested the support line of the channel at 0.61 cents. It sprung up like you wouldn’t believe. Yesterday the price closed at 0.725.

That support line is where the buying interest is. Traders are keen on this stock. We personally see it as a short-term in-and-out opportunity. Traders will probably grab this one and run with it for a short time. A big gain fast in other words.

Because the up and down price action since last December does not clear any major trend or direction, the oscillators and momentum indicators aren’t giving strong signals.

But oscillators aren’t what we have our eye on in this case. In this situation, where a road-block of trading capital has built a strong support line, we’ve staked out the On-Balance Volume (OBV) chart.



OBV measures positive and negative volume flow and can project major moves in the market.

When volume increases dramatically without any significant change in the price, it eventually translates into prices as investors accumulate. At some point, prices spring upward.

This is the technical equivalent of “smart money” (institutional investors like the pension funds, investment funds and large trading houses). If the big boys go long in a stock that retail investors are still selling, volume increases as the price is still slightly falling or trading sideways.

Eventually the retail guys get the picture. Big players often know things retail investors can’t.

Look at the spike on the OBV indicator that occurred 2 days ago. It’s likely that smart money entered long positions on the support. It’s a strong bullish signal. You can expect to see more cash follow the smart money in during the next few trading sessions.

Clearly, the main target of the potential upside move is the resistance of the trading channel, around $0.85. This one should all be over before too long.

Good investing,

Gabriel Andre