February 23rd, 2007

Coal Stocks: ACI, BTU, HW, FDG and MEE

To efficiently get a jump on future big movers, or “leading stocks” as IBD calls them, the Industry Group subscription provides 3 other pieces of information that I review daily: the daily Stocks on the Move, Daily New Highs and Industry Snapshot …. IBD’s look at Groups that, according to their determination, are the best and worst performing. Now this sounds like a lot of good information however, in reality, it requires a visual scan at the charts to spotlight the industries and stocks that either are about to or recently have already broken out.

Let’s begin with yesterday’s Industry Snapshot:

This information changes daily so, constrained by time, I focus only on those Groups that improve. What caught my eye today was the Energy-Other Group which increased significantly in the rankings (the “Worst Performing” portion of the list, I believe, is somewhat compromised by the fact that 4 of the 10 Groups listed are up significantly 50 places in ranking over the past 3 months). Here is the IBD’s chart of the Industry Group since June 2004:

I scrolled through the Group’s watchlist I created in my TC2007 and came away with the following observation: there’s a consolidation patterns forming in many of the coal company charts and these stocks are worthy of monitoring because a breakout may be forthcoming at the beginning of the next market upleg (after the correction that everyone is anticipating during the next several months ….. are we back to “sell in May and go away” again?).

While the Group includes 64 alternative energy companies (solar panels, batteries, etc.), I found the charts for the key coal stocks most interesting. See if you don’t also find similarities:

  • ACI: Chart
  • BTU: Chart
  • FDG: Chart
  • HW: Chart
  • MEE: Chart

Each stock is in the process of building similar interim consolidation patterns (either a pennant, an upward-sloping triangle or a double bottom). Each has retreated significantly from previous highs. However, the patterns can turn out to be either a reversal bottom or consolidation prior to another downward leg.

Perhaps it will end in a breakthrough on the upside due to increased foreign demand (China, India) or new technology to enhance coal as an alternative fuel. Alternatively, these may represent merely way stations before breakthroughs leading to another leg down due to new environmental concerns or future demand in energy generation being replaced by nuclear.

We’re less interested in the underlying fundamental reasons for behind a price move (we’ll let others tell us why stocks have moved after the fact); we’re more interested in whether money is flowing into the stocks. And the ranking of the group relative to others gives us that clue. Here is a history of the groups ranking over the past couple of years.

The group has had a significant run-up recently so my expectation that the breakout from these consolidations will be to the upside. We will continue to monitor.

more on integrating IBD with TC2007 to follow ……

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