MARKETS SPECTATOR: Is coal ready to fire?

Predictions of an inexorable decline for coal stocks seem to have been premature with the resource on the brink of an iron ore-esque rebound.

Coal stocks, both thermal and coking, have been out of favour for the best part of two years as concerns over the prospects of a hard landing in China drove a mass exodus from any name related to the industry.

On top of that, sentiment towards thermal coal, which is used to fire energy producing power plants all over the globe has been belted as the world tries to move towards a ‘green’ energy future.

However, amidst all the doom and gloom coal stocks look to be awakening from their bear slumber, both locally and internationally. Interestingly, they are showing many of the same characteristics that started a big rebound in iron ore names in recent months.

Perhaps the best proxy for coal stock globally is the Market Vectors Global Coal Index ETF, which trades in the US.

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Source: Iress

The above chart of the Market Vectors Coal ETF shows that the long term downtrend that has been in place since early 2011 has now been broken, with the stock moving into a basing pattern or what is commonly referred to as an accumulation phase.

This is the first stage of the stock market cycle and is characterised as the period where institutional or professional money slowly buys up stock in the desired security. This phase is characterised by fluctuations between a base and ceiling level. For example, in the above chart investors have not allowed the price to fall below the $22 floor nor rise above the $26 ceiling.

This basing stage is usually the precursor to an upside breakout and the beginning of a new bull market phase. However, the problem is determining how long the security may stay within the basing pattern. Given this, it’s best to wait for a decisive breakout through the ceiling of the pattern to confirm the stock is moving into a new bull market.

So in the above case, we would be looking for the market to break out above the $26 ceiling resistance level.

While this is definitely warranted in the case of the above ETF, a few stock-specific names in the Australian market look to moving already.

The stock attracting the most attention is Whitehaven Coal, which has today announced it has talked to China’s biggest coal company, Shenhua about possible corporate opportunities. This follows a lot of media attention recently which has focussed on the precarious financial position of Whitehaven’s largest shareholder, Nathan Tinkler.

No one knows how this will all play out but it’s definitely one to keep an eye on.

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Source: Iress

As you can see in the above chart, Whitehaven has today broken up through the top of its recent accumulation phase on stronger-than-normal volume. This bodes well for further gains, especially given the corporate interest from China announced this morning.

A couple of other names in the Australian coal space worth watching are Aquila Resources (AQA), Guildford Coal (GUF), Cockatoo Coal (COK), Bathurst Resources (BTU).