Three coal stocks that could be about to breakout

The outlook for coal, and the companies that produce it, is bullish from a technical and fundamental perspective. This article looks at three coal stocks that are forming bullish chart patterns and could provide a decent opportunity for both traders and investors.

Stock one: Arch Coal

Since reaching a peak of more than $73 in June 2008, US-based medium size coal miner, Arch Coal, has lost more than 89% of its value. However, as the chart below shows, over the past few months it has begun to form a nice basing pattern.

A 1 year chart of Arch Coal (ACI)A 1 year chart of Arch Coal (ACI)

Chart courtesy of stockcharts.com

Since making a bottom in late July at $5.14 Arch Coal has made a series of higher lows and in doing so has formed a an upward sloping line of support (thick blue line). The price is now bumping up against resistance at around $8, however I expect a breakout in the coming weeks towards the 200-day moving average (red line) at around $9.

A breakout on high volume would likely represent a decent buying opportunity.

Stock two: Peabody Energy

Peabody Energy, the world’s largest private-sector coal company, also reached a peak in June 2008. Back then it was over $84, while today it’s selling for $25.56 a share, more than 69% below its peak. However, just as with Arch Coal, Peabody has begun to form a bullish basing pattern.

A 1 year chart of Peabody Energy (BTU)A 1 year chart of Peabody Energy (BTU)

Chart courtesy of stockcharts.com

Having bottomed at $18.70 in July, Peabody has made several higher lows and is now doing battle with overhead resistance at around $26.22. Again, a breakout on strong volume would likely represent a good opportunity to go long the stock.

Stock three: Market Vectors Coal ETF

The third stock is actually the Market Vectors Coal ETF which is designed “to give investors exposure to the overall performance of the largest and most liquid companies in the global coal industry”.

In total the fund holds 34 companies including Peabody Energy, Arch Coal, Alpha Natural Resources, and the China Shenhua Energy Company, the largest coal supplier in China.

The fund is also down considerably since making a high in 2008, however, it too has formed a bullish chart pattern.

A 1 year chart of the Market Vectors Coal ETF (KOL)A 1 year chart of the Market Vectors Coal ETF (KOL)

Chart courtesy of stockcharts.com

As with the other two companies, a breakout through resistance (currently around $26), on decent volume is likely to provide a both a quick trading opportunity or an entry point for a longer-term investment.

The fundamental outlook for coal

Speaking to analysts at a conference in New York in June of this year, Peabody Energy CEO Gregory Boyce, noted that China has increased its coal imports in recent months.

“We project they will reach a record 285 million tons in 2012 as the country increasingly looks to the seaborne coal markets…We expect global metallurgical coal use to increase 25% by 2016, translating to an additional 250 million tons of demand growth, with the bulk of increases led by China and India.”

Mr Boyce is not the only one forecasting that coal usage will increase in the years ahead.

In the 2011 edition of the World Energy Outlook (WEO), the International Energy Agency (IEA) predicts that global energy demand could rise by 40% between now and 2035. And current trends indicate that consumption of coal could grow by as much as 65% over the same period if no changes in global energy policies are made.

As the World Coal Association notes on their website, despite concerns about climate change, “Between 2000 and 2010 primary coal demand grew by 4.4% per year, which is well above the average of 2.7% for natural gas and 1.1% for oil. In 2010, world coal demand was almost 55% higher than in 2000, which is a bigger increase in both volume and percentage terms than for any other fuel category, including renewables.”

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