Is coal off to the moon?
Yes, silly season has kicked off so I thought I would offer a few market curiosities.
You read the headline right – is it possible that the most hated commodity on earth – bar none – is in a roaring bull market?
We have all read horror stories of global warming being the most feared outcome of burning all of those nasty fossil fuels in the production of energy. Most governments have decided to close down most if not all of the existing coal-fired power stations and switch to natural gas and renewables (and perhaps some nuclear).
Even that arch-polluter India has got religion and is planning on cutting coal imports after years of massive growth
But the even greater polluter – China – is already cutting coal use in a very dramatic way
China’s coal usage, which peaked in 2013, is falling hard already and if the forecasts are correct, will fall to zero in five years or so. That is one massive straight-down collapse in coal imports (if it happens). This implies coal demand will vanish along with the coal mining industry.
And here in the West, the evil coal is already being phased out. The drama in the UK over the proposed Hinkley Point nuclear plant underscores how determined Western governments are to rid the earth of coal, never mind the staggering cost of its electricity if the facility actually gets built and actually produces power.
And the relentless march of the windmills over our land and sea shows no signs of abating in the desperate search for ‘alternative’ power sources in order to aim for the impossible mandated 80% emissions reduction target. It reminds me of the famous scene in the Disney film Fantasia where Mickey Mouse lets a magic spell get out of hand and cannot stop the march of the ever-expanding army of brooms carrying pails of water which inundates the place.
So with sentiment and the fundamentals extremely bleak for coal, you would think investing in a coal company would be akin to financial suicide, no?
But feast your eyes on this chart of a well-known ETF of coal companies, KOL
From the 2014 high, there was a steep decline in five clear impulsive waves from the $18 level to the January low at $5 – a loss of 72%. But then a curious thing happened – the share started a big rally just when sentiment had reached rock bottom. And that rally phase has taken the shares to the recent $11 area – a gain of over 100%, making this coal investment one of the better performers in 2016!
But note the shape for the rally – it is a clear A-B-C three up, which is the textbook reply to a five down. And it has almost reached the Fibonacci 50% retrace on a MACD divergence – a common turning point. Odds favour a turn down soon.
Once again, this market has moved against all rational expectations. Thermal coal price is up 22% this year and coking coal up 29%. These market moves have come totally against received ‘wisdom’.
The moral? Trade the wave patterns in the charts and against sentiment.
Iron ore continues its bull run
Steel is made from iron ore and coking coal, so they are related markets. I have shown before that this market is making classic bullish chart patterns which are extending.
Here is the daily chart
From the winter lows, the huge rally phase contains a beautiful five up with a long and strong third wave and an extended fifth (which also is typical in commodity charts).
From the 500 high, the market declined in an A-B-C three down and stopped right at the Fibonacci 78% support and from there, embarked on the latest rally leg. But note that this rally has a clear five up pattern! That is a bullish indicator as five impulsive waves up implies the main trend is also up.
But near-term, this five up will terminate and a corrective down phase lies ahead. Taking some profits off the table around here is a prudent course. And what great profits – from entry at the 340 level to the current 440 is a gain of a leveraged 30%. Nice.
And remember, I ignored the chorus of bears proclaiming commodities were headed for the basement last winter and used the clear technical signals the real world market charts were giving anyone who knew how to interpret them.
Has silver topped?
I have been bullish on silver for some time and have taken major profits off the table on the thrust up to the $20 – $21 area last month. But now, the picture is looking far less bullish. In fact, there is a huge bearish potential.
Bullish sentiment DSI has climbed to over 90% as silver has made a thrust up in recent days which was flagged by the breakout of the textbook classic wedge (pink bars)
And this latest thrust is in the form of another wedge (blue) which has very clear containing lines of support/resistance. And yesterday, the market broke sharply down out this wedge – which can now qualify as an ending diagonal. Also, there is a nice momentum divergence all along this pattern – a bearish sign.
And if so, this has set up my purple wave labels 1 and 2 with wave 3 down in progress. of course, a move back below the $19 area would confirm this scenario.
I am preparing VIP Traders Club members for a campaign in gold and silver to take advantage of the next big bear market.
