Whenever the word “Coal” comes up in conversation, a reaction of disgust has become the standard. The reasons range from, “It’s dirty” to, “We don’t need it” to, “Obama” (whatever that means)…..But I don’t know anyone who likes this space. Not a single person in fact. I bet I probably grossed some people out with this headline alone.
So as we like to do around here, when no one likes them it’s probably time to look a little bit closer. We’ll focus our attention today on shares of the Market Vectors Coal ETF $KOL. The first thing that stands out to me is the beautiful 5-wave pattern from the 2011 highs down to last year’s lows:
The next thing that sticks out to me is the potential double bottom formation down here near 17.25. This is a weekly candlestick chart. Look how on the second low last month, momentum (measured using a 14-period RSI) was putting in a much higher low. That bullish divergence stands out after a 5-wave decline.
I’m not a hard-core Elliotician. I find it too difficult and too subjective to sit there counting every single wave on every time frame. That doesn’t make much sense to me based on my time horizon and strategy. But I can’t help but notice something when it’s right there starring at me in the face. Trends tend to move in waves of 5. After a beautiful 5-wave downtrend, it would not surprise me one bit to see a nice recovery.
Remember, we don’t need a massive new uptrend. A correction of this 3-year downtrend could be violent. If the coal names just get back to the highs from a year ago, we’re looking at a 50% move. I don’t care who you are, that’s a lot. And what’s the risk? Well if prices make new lows, then we know we’re wrong. That presents us with about a 1:10 risk/reward opportunity. Anything wrong with that?
So why would coal stocks start rallying from here? Simple: who care why. Knowing why doesn’t pay us, never has, never will. And please don’t be that guy that compares it to Natural Gas. I know it sounds good on tv, but the math isn’t there. So please don’t….
I will say this though: look around. Who do you know that’s bullish on the coal names? I talk to a lot of people and I don’t know anyone. Do you?
Tags: $KOL $CNX $JOY $BTU