2014 has proven to be a very tough year for commodity traders. Those who concentrate their efforts in coal and other energy-related assets have been particularly hard hit — the coal industry, as measured by the Market Vectors Coal ETF (KOL), dropped by nearly 22% through Dec. 22. Based on the analysis below you’ll find that the downtrend is likely to continue for the foreseeable future.
Taking a look at the two-year chart, you can see that the bears sent the price of the ETF below a key level of long-term support in late September. The break below the support of the channel pattern suggests that the period of consolidation is over and that the long-term downtrend is set to continue.
To make matters worse for the bulls, the bearish crossover between the 50-day and 200-day moving averages is a common long-term sell signal that will likely stoke the downward momentum. Traders will also use bounce off the 50-day moving average (red arrow) and crossover of the MACD and its trigger line (red circle) as confirmation of the move lower. The combination of sell signals and bearish chart pattern suggests that the bulls will want to steer clear of the coal industry in early 2015 and probably want to remain on the sidelines until the indicators suggest that the downtrend is over.
KEY HOLDINGS OF KOL
When looking for trading ideas within the coal industry it makes sense to check out the top holdings of prominent mining-related ETFs, such as KOL. Based on the table below, you’ll find several interesting candidates that would make good additions to a watch list for 2015.
Company
|
Weighting (%)
|
Consol Energy Inc. (CNX)
|
7.23
|
Joy Global Inc. (JOY)
|
6.92
|
Alliance Holdings Gp Lp (ARLP)
|
4.80
|
Peabody Energy Corp. (BTU)
|
4.39
|
Suncoke Energy Inc. (SXC)
|
2.91
|
Source: vaneck.com
| |
Taking a look at Consol Energy, which is one of the funds top holdings, you’ll see that it is trading below its 50-day and 200-day moving averages. The recent bounce off of the 50-day moving average suggests that the long-term momentum is downward and many active traders will likely protect their short positions by placing a stop-loss order above either $36.85 (50 DMA) or $40.22 (200 DMA).
JOY GLOBAL
For those you don’t follow the coal industry, Joy Global trades with a market capitalization of approximately $5 billion. When it comes to manufacturing equipment for extracting materials such as coal, this is one of the best in the industry. When global supply and demand forces prices of underlying prices of metals and minerals lower equipment manufacturers such as Joy Global also feel the pinch. The chart below is a textbook-type example of how levels of support reverse roles and become areas of resistance after a technical breakdown. The recent bounce off of the 50-day moving average (red arrow) suggests that the long-term downtrend is likely to continue. The divergence between the MACD indictor and its signal line will also be used as confirmation by bearish traders as a sign of further selling pressure.
THE BOTTOM LINE
The chart of Market Vectors Coal ETF, which is a common barometer for the coal industry, is suggesting that the pain that has been felt for much of 2014 will likely continue into the early part of 2015. Based on the charts above, you can see that the ETF along with key holdings of the fund are trading below key long-term levels of support and the recent bounce off of their respective 50-day moving averages confirms that the momentum is likely to remain in favor of the bears. Bullish traders will likely want to remain on the sidelines until the charts start to show signs of improvement.
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(Source: Investopedia, Dec 29, 2014)
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