Chemistry for a Snapback

Along with the tremendous performance we have seen from basic materials and energy, the chemical stocks have shown strong performance as well. It makes sense that the need for chemicals to treat metals or used in numerous industrial processes would also rise. The strong global growth driving demand for just about every industrial process remains strong.

One company taking advantage is Celanese (CE - commentary - Cramer's Take), which has four operating units. They manufacture high-impact resistant plastics, advanced engineered materials, consumer specials and industrial specialties segments.

Its acetyl segment is its strongest, which has helped the company report record results for 2008's first quarter. Acetyl is used to make vinyl systems, paints, coating adhesives, polyester and fabric sizing.

It also produces advanced engineered materials and high-impact resistant plastics. This segment has experienced an increase in sales due to high demand in Asia. It will also benefit from growing interest in environmentally friendly plastics these past few months.

Celanese's consumer-specialties segment creates acetate and high-intensity sweetener products and has experienced a 5% sales increase during the first quarter.

The company's industrial specialties business meets the demand for environmentally friendly products by producing a new line of emulsions for the painting and coating industry that have less odor than paints in the past.

We can't say we know a lot about all this, but when we hear about the "going green" initiatives and providing products to an emerging market like China, we get excited. With regard to concerns about higher input costs, the company has entered into constructive long-term contracts.

For example, instead of creating methanol itself, Celanese bought methanol from a provider in Trinidad under a contract. Rather than using higher-cost alternatives, the company decided to use coal to provide carbon monoxide at its plants.

Celanese

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The technical configuration of Celanese is also positive and reflective of the strong underlying fundamental business. The stock broke out of a basing pattern back in April. This push to new highs led to a rally to the low $50s. You can see the failed rally attempt which coincided with the recent weakness in the basic materials and energy sectors. This has led to a pullback in the stock in recent weeks.

This is normal corrective price action and is providing an opportunity to establish long positions for a quick trade back to the old highs. Typically, the initial pullback in a strongly trending stock is seen as an opportunity to pick the stock up on the cheap. This leads to, at a minimum, a snapback rally. We would establish long positions at current levels with an upside target of the $48 to $50 range. We have a tight stop as well and would sell longs on a move below $41.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.