Coal Stocks Catching Fire Again

Coal stocks are heating up this September, trying to recapture the spark they showed during the 2007 and 2008 energy rally. That might be a tough chore, because the sector has lagged the broad indices so far this year. However, it's often a mistake to underestimate this peculiar market group, which can attract a huge momentum crowd with little warning.

Patriot Coal (PCX) -- Daily Source: eSignal

That's exactly what happened with Patriot Coal(PCX Quote) in the last two hours of Monday's session. The stock took off like a rocket, rising over 10% and closing at a 10-month high. The curious thing: There was no news to account for the rally, suggesting that hedge funds and chat rooms saw vulnerability and bid up the stock to squeeze short-sellers.

The wide-range rally lifted price over the 200-day moving average and into resistance at the broken lows from the 2008 crash. This warns that further upside might be limited, at least until the stock absorbs supply from that volatile period. However, the vertical spike suggests we take a closer look at the sector to see if other big rallies might be brewing.

Market Vectors Coal (KOL) -- Daily Source: eSignal

Market Vector Coal ETF(KOL Quote) sold off from $60 to $9.50 and bottomed out last November. It pressed above the 200-day moving average in May, tested that level for the next two months and rallied to a new recovery high in August. The fund topped out near $30 and dropped into sideways pattern.

It broke out on Monday, posting average volume, and pressed into an 11-month high. I'm always suspicious about rallies near round numbers during options expiration, and it's no different this time around. While the buying signal here is strong and steady, I'd wait on the sidelines to see how the issue trades into Friday's expiration finale.