Coal Looks Less Risky Now

03/15/2011 10:08 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

The nuclear crisis in Japan is causing massive risk aversion as investors dump stocks and move to “lower-risk” investments. Even precious metals are seeing selling pressure, indicating that cash or cash equivalents are likely to be favored over the near term.

In pre-opening trading just before 7:00 am ET, the S&P futures were down 35+ points and back to major support in the 1260 area. This suggests that the opening could mark a short-term panic low in many stocks and the major averages.

The outlook for nuclear energy has changed dramatically over the past week, and coal stocks now show very constructive patterns. This suggests that coal, despite the health concerns over coal-fired energy plants, may get much more attention in the coming months.

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Chart Analysis: The most liquid coal ETF is the Market Vectors Coal ETF (KOL), which has been in a trading range for most of 2011. Volume picked up in KOL on Monday (Mar. 14), as it did in many of the individual coal stocks as well.

  • The daily chart shows first good support (line b) in the $45 area with additional support at $42.30-$44.00. The daily uptrend, line c, is now in the $39 area

  • There is key resistance on the daily chart at $49.20-$49.80 (line a) and the first targets on an upside breakout are at $51.30 with longer-term chart resistance first at $53.80 and then at $60.30, the all-time highs

  • The daily on-balance volume (OBV) shows a similar triangle formation (lines d and e) and an upside breakout seems imminent. The weekly OBV (not shown) has already broken out to the upside

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CONSOL Energy (CNX) gapped higher and closed strongly Monday on the heaviest volume of the past two weeks.

  • The upper boundary of the triangle formation (line a) is in the $52.85-$53.05 area. There is weekly chart resistance at $55.40 and then at $58

  • The upside target from the triangle formation is in the $62-$63 area

  • There is first support at $43.38 with stronger support, line b, in the $45.35-$46 area

  • The daily OBV has turned up from its weighted moving average (WMA) and is very close to moving above resistance at line c. The OBV now has good support at line d

The daily chart of Arch Coal (ACI) shows a much broader trading range, but the stock rallied on Monday.

  • The lower trading range boundary (line f) and the daily uptrend are in the $30.70-$31 area (line g)

  • The key resistance on the daily chart, line e, is now at $35.50-$35.67. The trading range targets on an upside breakout are at $43-$44. This corresponds with the major 50% retracement resistance

  • ACI reached a high of $75.74 in June 2008 and the major 61.8% resistance stands at $52.00

  • The daily OBV has turned up from support at line 1 and looks ready to move through its downtrend (line h) in the next few days

What It Means: Clearly, the continuation patterns in coal ETF KOL, as well as the coal stocks CNX and ACI favor higher prices over the next few weeks and months. The massive selling pressure that was likely on today’s US market opening could impact the ETF and coal stocks as some investors panic to reduce their equity exposure in all sectors of the market.

How to Profit: Given a stock market opening that is likely to be 2%-3% below Monday’s close, new buy recommendations are only appropriate for the high-risk portion of any portfolio and for those that are underinvested in stocks. For KOL, buy at $46-$46.66 with a stop at $44.45 (risk of approx. 4.7%).

Of the two coal stocks, CNX looks more positive than ACI. For CNX, buy at $48.20-$48.94 with a stop at $46.53 (risk of approx. 4.9%). It is possible that ACI could break support briefly before moving higher. Aggressive traders could buy ACI at $30.86-$31.34 with a stop at $29.79 (risk of approx. 4.9%).

Related Video: The Three Best Coal Stocks

Update on Uranium Stocks: Technical patterns—like fundamental ones—do not always pan out. Last week, I discussed three uranium stocks that showed normal corrective patterns. In the majority of cases, this would create good buying opportunities, especially with the favorable demand outlook at the time. Certainly, the events in Japan changed the dynamics for these stocks. Fortunately, I only recommended buying lower and investing no more than 5% of your portfolio.

For Cameco Corp. (CCJ), I was looking buy at $35.24-$35.66 with a stop at $32.44, but no position should have been taken since it hit the zone only on Monday’s opening at $30.16, which was well below the stop. Denison Mines Corp. (DNN) had a low on March 11 at $2.97, so the buy at $2.98 would have been filled. It would have been stopped out on Monday’s opening at $2.33, though it closed Monday at $2.55. For Uranium Resources (URRE), it did not hit the recommended buying zone of $1.92-$2.08 until Monday’s opening at $1.68, which was just below the recommended stop at $1.69.

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