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.

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That's exactly what happened with

Patriot Coal


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 Vector Coal ETF

(KOL) - Get Report

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.

If it holds up, this breakout could signal the start of a new rally leg that reaches last year's "Paulson spike" at $38. This is good news for the rest of the sector, because this ETF is the tail wagging the dog. In other words, momentum payers and hedge funds bidding up this single instrument will have a synergistic effect on its underlying components.

Arch Coal

(ACI) - Get Report

dropped like a rock in 2008, finally bottoming out at $10.43 in November. The recovery effort stalled near $20 in January, with the stock dropping into a broad symmetrical triangle base. The stock rallied out of this pattern on Monday, on above-average volume, and posted a 10-month high.

It also mounted the 200-day moving average, like Patriot Coal did. Technically, it's better positioned for short-term upside, with an unfilled gap at $23.50 marking the likely target. That makes it a good play "on the dip" for active traders. It's another story for investors, however, because the issue could spend months working off supply in the mid to upper $20s.

Alpha Natural Resources


was my favorite coal play during the 2007 and 2008 rally, with the stock rallying into an all-time high at $119 before the bubble burst. It settled back to earth, around $14, in late 2008, and tested that level for five months, before starting to move higher. It finally cleared resistance at the 200-day moving average in July.

The rally stalled at $37.50, with the stock dropping into a five-week rectangle pattern. It didn't break out with other sector stocks on Monday, but a game of catch-up is always possible when momentum players are in the mix. For this reason, watch resistance at the upper blue line closely, because a breakout might trigger a slingshot into the mid-$40s.

The weekly chart of

Peabody Energy

(BTU) - Get Report

shows a steep decline from $89 to $16, followed by a choppy uptick that looks like a bear flag pattern. The stock stalled in June at the October 2008 swing high and dropped into a sideways pattern. It jumped back to that resistance level and broke out earlier this week, tagging an 11-month high.

This is a two-sided pattern, with the possibility of a rally into major resistance around $47. Things get trickier at that price level, because sellers could return in force and start an intermediate downtrend. So this is another play for traders who have marked out clearly defined reward targets and are willing to take profits when their numbers get hit.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in





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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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