Divergence Within the Coal Space
- Posted by Greg Harmon
- on September 13th, 2011
The broad market indices have stared at the European melt down happening the first two days of the week and decided to have none of it. The $SPY is up over 1.5% with the $IWM and $QQQ both up over 2.5%. It seems like everything is rising. Oh, except for coal. While there have been a few names that are up there are two that are lagging. The sector has had many rumors lately adding to the volatility in the charts pushing James River Coal, $JRCC, up over 2% but a couple of old trading favorites Peabody Energy, $BTU and Patriot Coal, $PCX, have seen no love and are down 1.5% and 3.3% for the week. Are they the exception or the rule? Let’s take a look.
Peabody Energy, $BTU fell like many of the coal names and the broad market making a low in early August. It has been in a range since then between 42 and 50 that has shown signs of tightening lately, into a symmetrical triangle. The Relative strength Index (RSI) has been stopped at the mid line twice and the Moving Average Convergence Divergence (MACD) indicator is fading. It also has all of it’s Simple Moving Averages (SMA) sloping lower. Interestingly the 20 day SMA has been kept a lid on it the last two days. The set up is clearly negative, until the price gets over 50 and the target for a move lower out of the flag below 42 would be about 30. A long trade in the range makes sense only if it can get over the 20 day SMA, and the RSI breaks and holds over 50. A laggard for a reason.
Patriot Coal, $PCX also made a low in early August and has been in a range between 11.75 and 15.45 since. It is also making higher lows but is stuck near the 20 day SMA that until recently, has been falling with all the other SMA’s. It’s RSI has also had trouble breaking 50 and the MACD is waning. This also sets up to be biased lower with a target of about $1 on a break below the range and it would take a move above the flag to reverse that. It could be played from the long side to the top of the range using the 20 day SMA as a stop, but that is a low probability trade, like a salmon swimming upstream.
James River Coal, $JRCC, it turns out does not really look any different until you get close in. Settling in a range between 9.40 and 11 the target for it’s bear flag would be zero. Yes zero. And it would take a move over 11 towards 11.85 to break that bias. But the RSI here is trending higher off of the lows and has a lot of room before is needs to decide if it wants to get into bullish territory over 60. Also the MACD is increasing. Both are diverging from the falling SMA’s. There is a long play here looking for resistance at 11 and then 11.85 above that.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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