Sunday, May 18, 2008

Commodity Charts May Be Going Parabolic, China Stocks Running Wild

Let's start off with two earnings plays from Friday's session. CPSL was a morning release and gapped up, closing near its highs for the day on almost its highest volume ever. It has a chance to run a little more I think, but I won't hold on long-term because it could also reverse quickly. Same situation with NED - good earnings Thursday after-hours (which I posted about that night) and had a nice day. Volume wasn't quite as high as CPSL, however, and the move NED made didn't seem to be as powerful. Maybe it will run, but it could soon peter out as well.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Calling a top in the commodity sector has been a totally futile task this year, and I am not saying that this is it. What I am saying with the charts below is that many of these stocks are beginning to look parabolic and are due for a major pullback at some point. That doesn't mean it will happen or that they are through. Back in mid-April, these stocks looked similar to how they do now, and all they did was pullback rather orderly for about two weeks, before continuing their major runs. I pointed that pullback out here, and the same situation may play out again, so there is no reason to panic or dump these stocks yet.

What I would be worried about if I was heavily invested in commodities is the fact that these low-float, lower-priced, lower-quality energy stocks like PDO and MXC are just going ballistic right now, and their action is a clear sign that they are just being pushed by the momentum crowd now. It has nothing to do with fundamentals, at least with these stocks. They are way overextended and can't go up like this much longer before crashing back hard. Maybe they pull back quietly or just rest in these areas, but could the climax-like action in these stocks be a tell for the whole sector? I have way of knowing for sure, but I am keeping an eye on it as a possibility. If nothing else, I would be very hesitant to put any new money to work in these sectors right now - wait for a pullback.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

It is not just oil stocks making huge runs. Look at these coal stocks. Longer-term charts show parabolic-type moves.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The shippers are not at all-time highs so I don't know if you can qualify their action as parabolic, but they are getting very extended as well, and with several reporting earnings on Monday, I would tread very carefully in these waters as well.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The one commodity sector that does not seem to be zooming higher is the agriculture stocks, and that is something I am watching. After pulling back on heavier volume mid-April, they have rallied somewhat higher on much lower volume, and without the strength of the oil and metals sectors. This bears watching - again, I have no idea for sure if the commodities are ready to top, but if they do, this is the sector I would focus on for shorts. The volume patterns in these stocks have been wrong for a while now.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

One of the biggest trends of last week is anything related to China moved big. Some of this was earnings-related (RCH, CPSL, and SOL as three examples) but some is just traders buying lower-priced stocks and momentum taking them higher. In past pullbacks, this type of action has acted as a short-to-medium-term topping signal for the overall market. SOLF reports earnings and after the run it has had, would be very wary of entering this stock here. I always get a little suspicious when I see the lagging stocks in a group (CSUN and SOLF) suddenly take off. There is nothing wrong with keeping them in your watchlist and seeing if they possibly rest quietly for a few weeks. Somehow, I don't see these stocks being very quiet right now.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Now to charts that I am focusing on as possible buys. Right now, my core positions are DGLY, FSYS, and OFI, but I would be willing to add certain types of stocks to that group. Stocks like RCH may turn out to be a great long-term play - since I sold it, it probably will. However, I want stocks that have already put up great earnings, were not beaten down, and are forming nice patterns if I decide to buy right here, with the market quite overbought. These four fit that description best as of right now. That doesn't mean I plan on buying any of them - it probably is best to be careful here adding new positions unless we rest a little early in the week on lower volume.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

If you're a risk taker and like to do one or two day, short-term trades, then you may want to watch these four China related stocks. If the momentum for this area of the market continues early in the week, you could see these stocks pop as well. HOGS might actually be a stock that could be held for more than a few days based on its chart, but the others are simply momentum plays that I would not consider holding for more than a day or so.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

To wrap up, here are some other nice looking charts that simply need some more rest before becoming buyable. GIGM, GU, and CLS all had earnings recently that acted as the catalyst for their runs higher. If they consolidate these gains like GXDX has done for instance, I would be very interested.

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

As I said yesterday, the trend right now is up and there is no reason to fight it if it will help you make money. It is certainly not a market where you can throw caution to the wind and just buy whatever you want. You still need to stick by your trading rules, not chase stocks that are extended or have no catalyst for a move higher, and cut any losses you may have quickly. But it is a market where money can be made if you pick the right stocks. The past two days, I have thrown a lot of possibilities out on this blog - I have no idea which of them will play out. As a trader, all I can do is be prepared for whatever the market throws at me, and that is what I am trying to do - think of all of the different scenarios that may occur and how I would react to them. Hopefully, those scenarios can help you prepare and be ready as well. Game five is only about thirty minutes away, so I have to go. Best of luck trading this week.


BUY ON THE DIP said...

those coal stocks drive us nuts.

JRCC hits new highs daily, so annoying.

nice post, great site.


Mac said...

I hear you - I remember seeing JRCC sit at its 50 day moving average - obvious buying position - and for some reason I did nothing. My biggest mistake this whole year is not having oil, metal, or coal stocks in my account. If they pullback again in an orderly fashion, I will look to add some. It will probably be too late at that point.

Thanks for the link - I added you to the blogroll as well.