Top Takes From RealMoney

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4. Plenty of Upside Potential for Coal Stocks
By Gary Morrow
12:51 p.m. EDT

After a powerful bull market throughout the first half of 2008, coal stocks collapsed in early July along with the bulk of the energy sector. When the bottom was finally reached in November, companies like Arch Coal (ACI Quote), Massey Energy (MEE Quote) and Consol Energy (CNX Quote) had dropped over 80%.

ACI Daily (NYSE) Arch Coal TradeStation

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MEE Daily (NYSE) Massey Energy TradeStation

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CNX Daily (NYSE) Consol Energy TradeStation

What followed has been a long and uneventful consolidation over the last six months. Daily average volume in each of these names declined dramatically in early November as the stocks became fully sold off. This trend continued into early January, along with a narrowing of price activity, as the healthy bottoming process dragged on.

When this year began, volume picked up, sparking numerous brief rallies that quickly ran out of steam. Lower monthly highs were made in February and March, along with higher monthly lows, as price action continued to contract.

This ongoing process is forming what may become an important base. All three companies have a tremendous amount of ground to recover once a powerful breakout takes place. The stocks are not at that point yet but the technical picture for the coal sector has improved quite a bit over the last few weeks.

My favorite in the group is Arch. I have built a small long in the name this week and expect to add once the stock clears the March highs on a closing basis. At this point, the below-average volume over the last week is not confirming a significant breakout but the price action is positive.

There is quite a bit of potential upside in Arch, Massey and Consol, but it is too early to tell if they're ready to rally. For now the trio will be watched closely for signs of life.

Long ACI