The coal sector has been one of the hardest hit since the 2008/2009 recession. While other sectors were also hit hard by that recession, for the most part they have recovered, as seen by stock market averages returning to the highs set back in 2007. But for the coal sector the damage remained with no real sign of recovery. At least not until very recently. This sector is showing signs of technical strength and may have finally ended its long and painful downtrend. Let’s look at the technical evidence.
For those who may not have followed the sector, the decline from the pre-recession top in the Dow Jones Coal Index has been dramatic, falling 80% from peak to recent bottom. However, since the beginning of this summer, the technical action seems to have changed and the relentless decline has stopped and created a rolling bottom.
Several technical indicators are showing strength.
- Note the recent break above the 50 day moving average and up-turn in that trend-line.
- A pattern of higher lows has begun as evidenced by the levels of the early September dip exceeding the late July low and the early October dip being higher than September.
- Previous resistance in the 165-170 area has been overcome.
- MACD is rising and made a bullish crossover coming out of the early October bottom.
Volume has not yet given strong confirmation of this uptrend, but in recent days this has improved and is an indicator that should be watched as rising volume with rising prices would provide additional confirmation.
Finally, a fifth technical indicator is the strong negative sentiment toward the sector as shown by the unusually high short interest in most of the bigger coal names. A review of the major coal stocks shows the following percentages of their float sold short:
ACI – 32.1%
ANR – 22.1%
BTU – 10.5%
CSX – 14.7%
JRCC – 26.0%
WLT – 7.6%
These extraordinarily high levels of shares sold short become potential buying as at some point those shares need to cover and must be bought back in. Any potential rally in coal stocks therefore could have the potential for a significant move as short sellers rush to cover to avoid a potential squeeze.
Most of the names listed above have exhibited a similar chart pattern to the Dow Jones Coal Index chart shown here, and therefore could be good ways of playing this theme. Also there is the coal miners ETF: KOL which can also be used. JRCC seems to be the leader so far in the rally since early October.
The coal sector, as the chart above shows, is volatile and subject to large swings, and therefore requires more caution than many sectors. While risk remains, the potential for substantial reward in the sector should not be overlooked.
