Cutting Position in James River Coal, Assuming Failure at Resistance

As I've been stating the past few weeks I'm bullish on commodities now that they are so hated. What I don't know is if the hedge funds are done liquidating. No one does. The other question as of last week is will the printing presses of America finally hit the dollar and cause people to roll back into hard commodities. Logic would dicate so, but logic has been lacking for a long time.

Just about every commodity chart looks identical - as we've discussed countless times. Frankly they look like bank stocks over the past 12 months.... broken down and beaten. Those banks stocks, however, have made large runs from time to time. But the question is will the commodities act like bank stocks did in the winter and spring (huge rallies that ended once resistance was hit?) or as they did more recently when some (mainly regional banks) broke through resistance and made nice runs ....

I don't know, so we are undertaking a simple strategy. Assume failure at resistance, and by doing so we will sell once a resistance area is reached. Then if we are wrong and this is the beginning of a new move upward, we can re-buy our position a bit higher on strength. For example, James River Coal (JRCC) is an excellent example - this has become our proxy for coal as we mentioned a few weeks ago. Instead of layering in and out of 4 positions in coal, we've been using JRCC to represent the group. Today the stock is up 10% and is now at a key resistance near $36. So our strategy is outlined above. We cut back here at $36 and (a) if this is an oversold bounce the stock will pullback or (b) if this is the beginning of a "new rotation" back into commodities we will pay up to buy it back on strength. Because if (b) plays out the move should be quite long lasting...

For now we are cutting JRCC to a 0.1% stake as it hits $36, down from a 1.6% stake. From the depth of its woes ($21s), the stock is up 71% in 5 sessions. Obviously 99.9% of us never bought it that low.... the stock is only back to where it was a few weeks ago before it was creamed.

Disclosure: Author is Long James River Coal in fund; no personal position.

Comments

[je:]

The 1.272 extension of the last down trend comes in at around $14.50. This is also an area of previous support and is a symetrical move with the last down trend.

Historically this is now the cyclical low period for energy. I have timing for lows from Sept .29 to
Oct. 13.
I know that is a holiday but that is just what the extensions say.

2008 Sep 23 09:04 AM

[Urbane Gori...:]

Just bought UNG long and expect to hold it through January. I've been looking at coal as well... But with the sharp little burp it just went through, I'm expecting it to pull back first. And unless something happens, such as China really coming back in the market, steel ramping back up, or the open-pit lawsuit against coal in Virginia closing in favor of the EPA types... Then I just don't see much to move it up in the nearer term.

Also, red an interesting article about India and China buying cheaper and less efficient coal from spot sellers in Malaysia. Apparently they will only buy if the sellers can match the price of cheap coal in China and India, which is less that we can sell and ship. If the Chinese really do clamp down on their mines (rather than just talk about doing so - they had another major calamity with a few dozen deaths two days ago)... Then maybe there might be an uptick.. Lets face it, Winter is on its way... In that case, maybe BTU would be a good buy, what with their Aussie exposure and closer shipping ..

jegan ;-)

2008 Sep 23 03:25 PM

[TraderMark:]

Just wanted to say, good call Mark ;) I'm starting to buy this back, down 20%+ from where I sold Monday.

A wacky market.

2008 Sep 24 08:06 PM