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) - Get Report

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.

REE Daily Source: eSignal

Rare Earth Resources


is a small-cap play that epitomizes the sector. It rallied out of obscurity, starting in August, lifting from $3 to $6 in less than three weeks. The stock then ticked higher in a graceful series of rally waves that ended near $14 in October and gave way to a trading range that found support at the 50-day moving average.

The stock bounced along that level for six weeks and then took off during the holiday, lifting to $17.92 and flaming out. The subsequent pullback also ended at the 50-day moving average, but the shallow recovery angle, at least so far, suggests a broad consolidation pattern and a second decline to support before momentum players finally make a return visit.

MCP Daily Source: eSignal



is a well-established miner, more than eight times bigger than Rare Earth Resources. It came public at $14 in late July, in a fortuitous act of perfect timing. The stock took off immediately in a steady uptrend that gathered momentum in September. It completed a price double a few weeks later and kept on going, finally topping out at $41 in late October.

The pullback found support in the mid-$20s and resumed its upward trajectory in early December. The rally pushed to a new high on Dec. 21 and took off in a parabolic uptick that added another 20 points in the next two weeks. Like other rare-mineral plays, it then topped out and sold off to the 50-day moving average.

However, this stock has bounced more forcefully than the fund or its rivals in recent weeks. This superior performance reflects a raw-materials stockpile that can come on line in less than two years and, according to the company, supply 100% of the minerals needed in the U.S. It looks like investors have taken note and are buying this issue more aggressively than its competitors.

SHZ Daily Source: eSignal

Finally, we come to

China Shen Zhou Mining and Resources


, which is a direct China play on the rare-earth group. Of course, this issue won't be encumbered by a future embargo, and that is good and bad, because it removes a speculative element from price development. You can see how this geopolitical positioning has come into play on the six-month chart.

The stock languished when U.S. and Canadian rare-earth miners took off last year, because the Chinese embargo was bad for exports. The authorities finally lifted that ruling, setting off an October breakout over a 16-month trendline (blue line). The stock went vertical, lifting back to its 2008 IPO (red line) in early January and pulling back with the broad sector.

The January decline looks similar to today's other entries, but buying interest at the 50-day moving average has been limited, at least so far. The good news is that the stock has carved out a bullish basing pattern at support, which does favor a quick rally up to the big gap near $7.40. I'd take aggressive profits at that level, ahead of a longer-term consolidation pattern.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider REE to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Farley was long SHZ, although holdings can change at any time.

Alan Farley is a private trader and publisher of

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, 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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