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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Rare-Earth Stocks Ride Again

Stocks in this article: REE SHZ MCP

Rare-earth stocks caught fire in the second half of 2010, with many components going vertical after momentum players piled into the speculative sector in force. The group topped out when the calendar flipped into January and spent several weeks shaking out overzealous bulls. The most popular names hit intermediate support late in the month and have now turned higher.

Real demand drove the rally's first leg, in a natural reaction to Chinese domination of active rare-earth mines. But the second leg, which took place in late December, raises a red flag, because the thinly traded Market Vectors Rare Earth Strategic Metals ETF (REMX) may have triggered an unnatural buying panic over the Christmas holiday and lifted components into parabolic spikes.

If the derivative tail was wagging the rare-earth dog on that second rally, the sector could now have a tough time finding enough committed buyers to get back to the 2010 highs, unless China helps out with a brand-new embargo. Barring that event, market players will need to focus squarely on the technicals, looking for clues about the future of this unique group.

REMX Daily
Source: eSignal

The Market Vectors Rare Earth Strategic Metals ETF came public near $20 on Oct. 28, trading over 2 million shares and then settling into average daily volume closer to 200,000 shares. It ground sideways in a tight range between $19 and $22, finally lifting out of congestion on Dec. 28, when it spiked to over 1 million shares.

Trading activity percolated through the fund in the next five sessions, hitting 1 to 2 million shares each day, with price finally topping out at $27.19 on Jan. 4. It rolled over and dropped back to $22 just four days later, where the fund chopped sideways for over three weeks. It lifted out of the trading range last week and has now retraced 62% of the prior downswing.

Buying interest has been steady off the low, but the fund isn't attracting the speculative fervor we saw in late December. As a result, I expect that momentum players hoping for a V-shaped rally back to the January high over $27 will be disappointed as this instrument drops into a broader consolidation pattern that eventually looks like a triangle or rectangle.

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