KOL (Market Vectors Coal ETF) will be added as an AGGRESSIVE Long Trade & Long-Term Trade idea here around the 17.24 level. I’ve pointed out this long-term basing pattern in KOL recently and I’ve been following several of the individual coal stocks with interest lately, as they are in what looks to be the final stages of being “puked-up” by frustrated longs throwing in the towel and finally writing many of these companies off for good. I am fully aware of the environmental issues the coal industry faces and even some of the unique aspects within the US coal industry (e.g.- cleaner burning Appalachian coal vs. the “dirtier” but cheaper sulfur-laden Illinois basin coal). Here’s a link to an informative overview of the US coal industry for those who might be interested in this “catch a falling knife” trade.
Fundamentals aside, the technical case for an aggressive long entry here for either a bounce trade or very likely, a bottom in the coal stocks can be made from these two charts below. The first chart is a weekly chart of the Dow Jones US Coal Index, showing what appears to be an Inverse Head & Shoulders Pattern in the making. Keep in mind there is still quite a bit of work to be done on this pattern, first & most importantly would be to see prices reverse very soon in order to finish putting in a right shoulder (i.e. – a move back up towards the neckline of the pattern), while keeping the symmetry of the pattern intact.
Also included below is the daily chart for KOL, showing that prices are approaching the bottom of the 15+ month basing pattern while extremely oversold. Buying this support with the appropriate stops below seems like a very objective entry although keep in mind that many of the individual coal stocks in a virtual death spiral, under extreme distribution and in such instances, it is not uncommon to see a substantial but relatively brief overshoot of support. As such, my preference taking a position here as a potential long-term/bottoming play would be to use a stop criterion of three consecutive weekly closes below the 17.00 level. That should allow enough time for any temporary, momentum driven overshoot of support to regain the bottom of the long-term basing pattern, assuming that this is indeed a selling climax in the coal sector.
- $DJUSCL weekly Sept 25th
- KOL daily Sept 25th
click here for the live, annotated weekly chart of $DJUSCL click here for the live, annotated daily chart of KOL
I also have a short list of my favorite individual names in the coal sector which I might also add as official trade ideas soon. That list includes CLD, OXF, YZC* (a Chinese coal stock), WLT, NRP, ACI, & BTU. I can not stress enough the risk involved in buying any of these individual coal stocks as most are still in free-fall and the risk of bankruptcy on any of these names in the near future is certainly a possibility. With coal still being the cheapest energy source and a presidential election coming up (lost coal jobs = lost votes, hence, I would expect some pandering/support to the US coal industry from both parties in the very near future), my guess is that even if the coal industry is going the way of the prehistoric plants & animals that created it, the extinction of the US coal industry isn’t going to happen overnight.
On a final note, my preference for positioning into the individual coal stocks as potential bottoming or even just “oversold bounce” trades is to use a shotgun style, scale-in approach: buying very small lots in each of the individual names above over the next several weeks, only bringing my exposure to the sector to a “full position” once we get some fairly decent evidence of a trend reversal. As always, DYODD and only consider trades that align with your own risk tolerance, objectives & trading style.