Jumping On Board: A Cautionary Tale

Metals Creek Resources managed to impress the market with a drill result that, in fact, was very good. It got a drill hole that showed 4.37 grams per tonne of gold over 23.4 metres. That's a large length from an area on their Ogden Gold Project in Timmins, Ontario called the Thomas Ogden Zone. Not much drilling has been done on that Zone. Other holes were less impressive, but this one holds out hope of a major deposit.


This result was announced at 9 AM ET, a half an hour before the market opened. That result made the stock really popular. The first trade of the day went at 37.5 cents, for a gain of 10.5 cents or 28% since yesterday's close. Other orders came in fast and furious. Within thirty seconds, a trade was made at the day's high of 42 cents.


Then, a detour cropped up on the road to riches - one that turned into a U-turn. The stock quickly sunk to 37 cents. Despite a pullup to 39, it resumed sinking. Forty-five minutes after the open, it has settled between 35 and 36 cents. The 35-cent floor broke just after 11:00, and the stock continued drifting downwards to 31 cents. A rebound in the early afternoon to 33.5 cents didn't hold; as of 2 PM, it was drifting around at 32.5 cents.


The unlucky person who got some Metals Creek at 42 cents wound up with a loss of 22.6% as of that time.


How does somone wind up being that unlucky? Simple. That up-spurt at the beginning had one and only one cause: a pile-up of buy orders between the time the news was released and the market's open. Given that the first one went at 37 cents, even the "lucky" guy who was first with the market order proved to be unlucky once the hysteria cooled. 37 to 32.5 cents means a loss of 12.2%.




The Moral Of The Story: This one's simple too. Don't be one of them! If an exciting news item gets dropped before the market opens, either put in a prudently-set limit order or sit back and watch how the thing trades for a time. If it sags, then consider the possibility that it'll sag some more - like Metals Creek did.


There are exploration stocks that make up for it over time, and there's a chance that Metal Creek will be one of them. At the very best, though, rushing the door and crowding the entrance leads to a bad entry point that shaves the future profit. More often, it leads to an embarrassing loss - one of those "learning experiences."


Here's the Metals Creek 1-day chart, from Google Finance:




And, for perspective, here's the 1-year chart from Stockwatch. Today's action more than reversed its recent drop.



Disclosure: I don't own any Metal Creek.