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I Bought CLF On Thursday's Coal Downgrade; I Sold Today On FBR's Stock Upgrade

|Includes:Cliffs Natural Resources Inc. (CLF)

Following a much better than expected earnings report on 4/24/13, CLF rallied big the next day and left a gap between 18.22 and 19.52 on its way to 22. After falling back to 19.77, CLF rebounded to 21.98 and looked like it was going to bust through the 22 area resistance. Well, with all the short interest in this stock, it was important for the bears that the stock was attacked with a downgrade to keep this stock from making a bullish run towards 30. The bears got their wish on Thursday 5/2/13 when the coal sector was downgraded along with news that WLT may have to issue more stock to cover their current debt obligations. An analyst predicted 6% lower coal prices in 2013 and 14% lower prices in 2014. Like anyone can really make a prediction about 2014 prices in coal. Also CLF sells metallurgical coking coal, a niche market that is tied somewhat to the price of iron ore and steel, and not directly tied to the broadly available bituminous coal used in heating and power plants. CLF was pulled down with the coal sector stocks and hit a low of 19.02, partially filling the post earnings gap. I bought into that Thursday 5/02/03 dip caused by the downgrade. Anyone who sold into the lows was wrong to do so.

Now it is Monday, 5/06/13 and FBR upgrades CLF and we get a pop to 21.14 which allows me to sell above 21, the shares I bought under 20 last Thursday. Upgrades and downgrades do have a one day impact. If a downgrade occurs, then sell out early in the day and buy your position back near the lows of the day, usually near the close. And likewise, on upgrade days, use strength to sell out the shares you bought on the downgrade days. Smart money makes money by doing the opposite of upgrades and downgrades, by fading the advice. Thus, what good is the advice then for the average retail trader?

Upgrades also tend to increase near highs in a stock and downgrades near the lows. It happens in commodities as well as stocks. When crude oil was in the $127 to $130 area they began predicting a move to $200 or higher. Just above $140 crude topped out and fell into the mid $30s. In stocks I like to buy the close of a downgrade day. In commodities I like to fade a bearish report, especially if it is a real shock to the market. However, related to commodities, one usually has to wait till the 3rd day to buy. As long as traders act like lemmings and dump out of their positions when analysts tell them to do so, the analyst downgrade will always be a self-fulfilling prophecy for at least one day. And if you like the stock, you know when to buy, the close of the downgrade day.

Disclosure: I am long CLF.

Stocks: CLF