"Like you, I started buying Denison Mines quite early, when it was around 2.0 and have since built up a sizable position. While the Uranium story still looks good fundamentally, something about the chart bothers me and I just thought I would run that by you!

"If you have a look at the monthly chart in U.S. $, in the last run up from 2003 to 2007, in the early phase of the move ie from October 2003 to September 2006 (before it went ballistic), it had reverted to the mean ie its 200 dma, several times. In the present situation, the price at 4.2 is quite extended compared to its 200 dma at around 2.2. We all know that the rally in S&P etc. is also long in the tooth and a correction of at least 5-8% (normally the correction in Uranium stocks would be a multiple of this figure) cannot be ruled out at some point in not too distant a future.

"Considering all this, would you [say?] that there is a reasonable possibility of the stock declining close to its 200dma, which would mean a sizable decline from the current price? The Uranium stocks seem to have generally lost the tremendous forward momentum they displayed towards the end of last year!

"I thank you in advance for your comments.

David Fuller's view Congratulations on seizing another opportunity in the markets and thanks for asking a question certain to be of interest to many subscribers.

Mean reversion is one of the most frequent and important developments in markets, to the point of being a near certainty at some stage. The more difficult challenge is to gauge when mean reversion is likely to occur within short-term, medium-term and longer-term trends, although the price charts will eventually show us.

The email above mentions both Denison Mines (in USD) and the S&P 500 Index as mean reversion candidates, which I have illustrated with monthly charts as also mentioned.

This bull market for the S&P has been less orderly than its 2003-2007 predecessor, perhaps because of the dramatic nature of the 2008-1Q 2009 crash and also the monetary stimulus which followed. Nevertheless I agree that a phase of mean reversion could commence at any time, due to another periodic change in investor fashion.

The chart patterns are not similar, as you can see. Even though Denison's bear market was bigger, it bottomed earlier, and has also seen the greater percentage recovery to date. Denison spent most of its post-low trading in an extended base formation development. Consequently, its MA was flat for a long time and will inevitably lag on explosive base formation completion, as sometimes occurs with these lengthy Type-3 patterns.

In answer to your question, yes, Denison could now fall back very sharply towards its MA, but I doubt that it will. Explosive base completions from Type-3 patterns occur in a thin supply environment relative to demand. In my observation they are more likely to be followed by a slower, ranging step sequence advance, which may last longer than the initial recovery before eventually spilling over into a larger correction.

If so, the reason for this slow, extended rise is that fewer potential buyers had a chance to climb aboard during the initial advance, either because they did not see it or were reluctant to pay up after all that sleepy base formation development. As the initial advance slows, some of the early buyers commence taking profits. Simultaneously, if the base is sufficient to support higher levels and if the fundamental background is sound, a second wave of demand enters the market. This helps to keep reactions small relative to the initial gains. Although supply and demand are now more closely in balance, new buying plus return buying from those who regret having sold, contribute to the ranging staircase phase of the uptrend.

A question you may wish to ask yourself: are most of the people likely to buy uranium shares fully on board today, or are they hoping for a pullback? Also, is this sector sufficiently attractive, and is the overall market environment sufficiently benign to entice more buyers on board?