in the uranium sector...hmmm

Cameco Corporation: End of an Uptrend or Buying Opportunity?

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After rising to over $33 as we entered 2010, Cameco Corporation (NYSE:CCJ, TSE:CCO) has undergone a significant correction, falling to nearly $28 in trading at the end of last week.

The question is: Has Cameco broken down from its uptrend over the last six months, or is this an opportunity to acquire this stock at a significant discount?

When we draw a support line for the recent rally, we can see that the recent drop has made CCJ brake down through this support, which is a negative sign. Although we see further support for CCJ at $26, we cannot pinpoint any real level of strong support before then.

However the technical indicators say that this is a good buying opportunity. The MACD and Full STO are on the floor and most notably the RSI is at 29.22, below 30 and in what is usually our strong buy zone.

There are two main things that concern us however. Firstly the recent weakness in Cameco’s stock price coincides with the recent 600 point drop in the DOW industrials. This indicates to us that CCJ may be more correlated with the mainstream equities markets than we are comfortable with, given our present bearish stance on them. Secondly we cannot say that we are completely confident in CCJ and its fundamentals long term, as although Cameco has some of the best brains in the industry, Cigar Lake appears to be a dark cloud that will be hanging over this company for years to come. This is the reason we decided to sell our position in the company quite some time ago and why we continue to have trouble justifying a long term position in the stock.

But if one puts the long term aside for the time being, and see this purely as a short term trade, there could certainly be a trade to be made here. We would consider buying the stock here with a tight stop for a rise back to at least $30 in the next month or so. A more cavalier approach would be an options trade on the Feb-10 $29.00 Calls on CCJ (or equivalent on Canadian markets) which are currently trading for 75-80 cents. We would not hold the calls for more than two weeks and would intend to sell them once the contracts were in the money, ie once CCJ was trading for $29 or more.

Due to the fact that CCJ appears to us to be moving with the general equities markets, we are going to sit this one out and not place a trade. We are bearish on equities and think CCJ could get dragged down with the DOW, which would jeopardize our planned trade. We also do not want CCJ as a long term holding, which could’ve been a plan B if the short term trade didn’t work out. However if you are bullish on Cameco long term, this looks to be a good opportunity to add to your position at a decent discount, and maybe even make a short term trading profit.

Cameco trades on the NYSE under CCJ with a market cap of $11.4B. It has a P/E ratio of 21.99 and earnings of $1.29 per share. Cameco also trades on Toronto under the symbol CCO.