Will the Republicans Really Trigger a Coal Bull Market?

11/06/2014 10:20 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Coal stocks gained on the assumption that Republicans back in control of both houses will create a friendlier environment, so MoneyShow's Tom Aspray goes to the charts to see if any new positions in the coal index or individual coal stocks are merited.

The markets reacted positively to the big Republican win as once again the Dow Utilities led the way gaining over 2%. The market internals were positive with the new all time highs in the Dow Industrials and S&P 500.  The ADP Employment report was also a plus for the market ahead of the US jobs report on Friday.

The precious metals were hit hard with the Market Vectors Gold Miners (GDX) plunging another 2.6% on double the average daily volume. As I reviewed yesterday, the monthly and weekly analysis on the precious metals, as well as crude oil, continues to favor lower prices.

Crude oil did bounce yesterday as inventories did not increase as much as expected. Overnight news of attacks on Libya's oil fields have helped to firm prices and the Philadelphia Oil Service Index was up 2.6% on Wednesday.

Another big winner was the Dow Jones Coal Index gaining 4.17% on the day. This index is down almost 20% for the year with some individual stocks down much more. They gained on the assumption that, with the Republican control of both houses, it will create a friendlier environment for the coal industry, but what do the charts say?

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Chart Analysis: The DJ Coal Index hit a low of 95.82 in mid-October and closed Wednesday 19% above the lows as the downtrend, line a, has been tested.

  • The daily chart shows a short-term uptrend, line a, as the starc- band was tested at the October lows.
  • The 38.2% Fibonacci resistance is at $116.54 with the 50% resistance at 123.64.
  • The relative performance does show a potential short-term bottom, line c.
  • The RS line is still well below the longer-term downtrend, line b.
  • The daily on-balance volume (OBV) has reached its highest level since late September with long-term resistance at line d.
  • The weekly OBV (not shown) is still well below its declining WMA.
  • There is short-term support at 107-108 and the 20-day EMA.

Peabody Energy (BTU) gained 4.76% Wednesday on volume of over 17 million shares, well above the three month average of 11 million.

  • Over the past three months, it has lost almost 30% and it is down 43% YTD.
  • BTU did form lower lows in October and is just below the monthly pivot at $10.92.
  • The daily starc+ band and October high are now at $11.60-$11.75.
  • The quarterly pivot at $13.66 falls between the 38.2% and 50% retracement resistance from the August high.
  • The daily RS line also made new lows with prices but is now testing its WMA.
  • The daily OBV did form a bullish divergence, line h, at the lows.
  • A move above the OBV resistance at line g, will signal a stronger rally.
  • There is short-term support at Monday's doji close at $10.52 and a daily close Thursday above $10.84 will trigger a HCD buy signal.
  • The key support is now at $9.91.

NEXT PAGE: An Energy MLP to Watch

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National Resource Partners (NRP) is a $1.4 billion MLP that has a yield of 10.94%. It closed up 9.4% Wednesday and it beat earnings estimates on Tuesday.

  • NRP is down 28.79% for the year.
  • The resistance going back to the May low is at $12.78, line b.
  • The daily starc+ band is at $13.48 with the quarterly pivot at $14.10.
  • There is even stronger resistance above $15 (line a) with the quarterly projected pivot resistance at $15.63.
  • The relative performance is trying to form a bottom, line e, but needs to move above the resistance (line d) to confirm.
  • The daily OBV is still below its WMA, which is now trying to flatten out.
  • The weekly OBV has turned up but is still well below its declining WMA.
  • The 20-day EMA is at $12.42 with the further support, line c, in the $11.46 area.
  • In October, NRP had a low of $10.50.

What it Means:  On a short-term basis, the DJ US Coal index and the coal stocks are likely to move even higher. The problem with new positions is the risk after the sharp gains on Wednesday.

As an example, those considering buying Peabody Energy (BTU), the stop would need to go under $9.91, let's say at $9.82. This would require a purchase at $10.31 or better to limit the risk to 5%. This level seems unlikely to be hit over the next few days.

Most of the other coal stocks are very low priced like Arch Coal (ACI), which closed at $2.35 and Alpha Natural Resources (ANR) at $2.43.

The risk does look more favorable in some of the small-cap stocks I featured on Tuesday.

How to Profit: No new recommendation.

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