King coal is waking up after a short slumber and taking underperforming steel stocks along for the ride. This is a positive development after several weeks of lower prices, adding fuel to a broad-based commodity rally that keeps gaining momentum. It also gives traders and investors decent entry prices in a bull market that has gotten way ahead of itself.
Looking back, the coal sector topped out on Jan. 12, after a speculative bid finally fizzled out. The entire group had been on fire for several months, thanks to endless rumors about a
takeover bid. That news came true on the last day of January, when
bought Massey for a healthy premium, but other coal stocks failed to rally.
Instead, a sell-the-news reaction hit the sector, knocking the
Market Vectors Coal ETF
down to the 50-day moving average. That level held firmly last week, encouraging a Monday bounce that should carve the next stage of a double-bottom pattern. This suggests that the coal correction is coming to an end and that the group will now resume its seven-month uptrend.
The short-term pattern shows two decent entry points, whether you're a trader or timing-conscious investor. First, wait for Monday's gap to fill, and then enter your position, keeping a stop loss under the twin lows near $45 (red line). Second, wait for price to push above the Feb. 2 high at $48.11, because it will take a buying spike over the level to confirm the double bottom.
The fund hit an all-time high at $60.30 in June 2008. There are few obvious resistance levels between the January peak at $49.80 and that lofty price level. As a result, the next trend wave could be quite strong, lifting price through the $50s in a vertical trajectory. However, this nascent recovery first needs to mount that high, and that could take several more weeks.
Industry leader Alpha Resources has been struggling since the late-January acquisition news triggered a heavy-volume selloff into a six-week low at $52.18. While the merged entity of Alpha and Massey should be a sector powerhouse, it's clear that funds and private investors are still not confident that the coal marriage will be good for business.
Things took a positive turn on Monday when the stock gapped into the 50-day moving average and then closed above that level for the first time since Jan. 28. However, the recovery faces heavy resistance in the upper $50s, and I don't recommend being a buyer until it mounts that price zone and then sits comfortably in the low $60s.
Alpha's weekly chart looks more bullish, with the recent downturn coming to rest on top of the new support at the January and April 2010 swing highs (blue line). Weekly stochastics hit a deeply oversold level two weeks ago, while the correction held secondary support at the 20-week moving average. These positive factors suggest that a major upturn is at hand.
The conflict between daily and weekly views tells us that this stock should offer a better opportunity for investors and long-term position traders than for swing traders. Simply stated, decent returns will require a good deal of patience and the ability to sit through adverse price swings that might be uncomfortable if you're playing the market for immediate gratification.
Coal and steel stocks are joined at the hip in most bull markets, so it isn't surprising that big steel turned higher last week and is starting to challenge highs that were struck earlier this month. My favorite U.S. sector play is
, which is a current pick in my
newsletter. You'll find even better action in the overseas manufacturers, as I highlighted in a
Focusing on domestic plays,
is a relatively small Ohio-domiciled corporation that houses numerous steel production facilities across the country. The stock has been a relatively weak performer for the last year, but that could change in the weeks ahead. For now, traders and investors need to watch price development at the January and February highs.
The stock sold off to a 52-week low last summer and entered a symmetrical triangle basing pattern that broke to the upside in December. It zoomed up to a January high at $17.29 and reversed sharply, dropping into new support and then bouncing into early February, when it hit a second rally high just a few cents below the first one.
A secondary pullback ended at 50- and 200-day moving average support last week, with price spiking up to a third high on Tuesday. This sets up a small-scale cup-and-handle breakout pattern, with a strong buying signal when the rally finally lifts through the $17-to-$17.30 price zone. The subsequent uptrend could be quite strong, yielding a fast move into the mid-$20s.
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
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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