The Outlook for Durban Deep

Letter from a Durban Deep investor: "I have a lot of money in Durban Deep 25000 call options I paid 160 with a 50 Rand (US$8) strike price. They are due to expire June 2002. I read a report [recently] that said gold could start up soon. Do you think I should hold to Jan-Feb.? I would very much appreciate your thoughts."

The above letter typifies the mixed sentiment and concern over Durban Roodeport Deep's (DROOY) performance in recent weeks and its expected performance in the weeks and months to come. What can we expect from Durban in the way of price performance for the remainder of 2001? Will the threatened South African mining strike materialize, and if so, what impact will this have on Durban's operations? Is Durban Deep doomed to die as some gold analysts have suggested recently? To that end we have dedicated the following report to an in-depth examination of Durban's technical, cyclical and seasonal performance and offer forecasts based on the variables we have described. What follows is our analysis and expectations for Durban Deep over the coming year.

In the past year there has been very strong and pronounced buying at the $0.70 and $0.90 levels (where Durban presently stands). Some downside potential remains over the next couple of weeks, but even this short-term weakness should be exhausted sometime in August based on cyclical and seasonal factors. Once this final pocket of weakness is squeezed out Durban will have the all-clear for a lengthy upside run well into 2002.

Durban has a seasonal cycle that corresponds very closely to the seasonal cycle for gold futures. The month of August tends to be especially propitious for Durban Deep investors as this month usually months the ending of the declining phase of a seasonal cycle plus several dominant short-term and interim cycles. Along those same lines, the following quote from a recent commentary we wrote are worth reprinting: "The good news for fans of Durban Deep (DROOY) is that its dominant short-term cycle bottoms earlier than most major mines, in this case in the month August. That means DROOY could become a buy within a few weeks from now. We expect the bottom to be at or near the $0.90-$1 level. Once Durban starts up from this support zone it will encounter resistance between $1.30-$1.40 but this will be overcome and once it is the bull market in Durban Deep shares will really be underway.

The stock is currently in a technically weak position, however, and should be avoided until it bottoms, but based on current trading volume configurations the bottom should be forthcoming soon."

Traders who are bearish on Durban Deep point to the failed test of a three-year declining trendline in May. While it is true that Durban rallied and attempted to break above this line of supply on high volume, penetrating over the top temporarily only to reverse back below, the implications are not as obvious as they seem. To most market technicians this is a clear case of a failed rally. Yet a reconstruction of the actual tape shows that most of the volume representing buying on the way up and little of it was actual insider unloading. This is one of those instances known as a "head fake" where the market signals its intent by momentarily breaking above a declining trend, then promptly reversing in order to fake and shake-out the weak-handed traders who lack capital and firm commitment. This is done so that inside buyers can accumulate bigger lines of shares under the cover of (false) weakness. It is a classic study in manipulation.

Because of the volume pattern associated with Durban's May upside breakout (which is visible only in the tape) we are led to conclude that Durban, despite its weak immediate-term position, is actually in very strong hands. Accordingly, it has a fabulous future ahead of it in the months ahead. In answer to the inquiry at the beginning of our commentary, our advice is to hold on to those June 2002 calls.

Another factor worthy of consideration is the fact that Durban has run its three sections down over the last three years and this is very typical of a bear market. In Elliott Wave parlance this qualifies as an ending "a-b-c" pattern. Also, the proportions between the various sections of decline from the top and the percentage retracements over the past three years are very much in line with what one would expect to see at a major bottom. Bottom line: Durban Deep's bear market has nearly ended and has been under accumulation at various stages and in varying degrees for at least the year.

Finally, the pattern in Durban's 3-year chart is that of a very conspicuous declining wedge, which is typical for ending bear markets. Prices tend to move out of declining wedge formations very slowly and sometimes unevenly, but the pattern has a very high accuracy rate in forecasting bottom reversals. Durban has already broken out of the "apex" of the wedge and should begin moving higher with force later this year, quite possibly by late summer.

Based on all considerations we rate Durban Deep a buy above $0.90 with expectations of considerably higher levels in the year ahead. The implications of this forecast and analysis are very clear. Regardless of what happens to Durban in the way of mining strikes, shutdowns, gold price manipulation, etc., the insiders and market makers who control DROOY's movements are signaling their buying (albeit in a very subtle fashion). Durban Deep buyers will prosper in the coming year since the fundamental outlook is contained within the chart, and the chart has given us very clear signals of the company's underlying situation.