Avoid the rare-earth stocks

Weak chart patterns show that now is no time to be long these shares.

By MoneyShow.com Nov 14, 2011 12:41PM

By Tom Aspray, MoneyShow.com

Though the long-term argument suggests there may eventually be a shortage of rare-earth metals, the technical action of the key stocks suggests they are vulnerable to another sharp decline.

Molycorp (MCP), the largest rare-earth stock, was hit hard Friday after reporting earnings after the close on Thursday. Though net income was $48.4 million, up sharply from the net loss of $10.1 million in the year-ago period, earnings per share missed analyst estimates by three cents.

Molycorp also reported that its new expansion and modernization plan, called "Project Phoenix," is ahead of schedule, that it should be significantly increasing production of rare-earth oxides by the end of next year. Some fundamental analysts who follow this sector are concerned that this will make the rare-earth metals less rare, and therefore, will push down prices.

Technically, the weekly charts suggest these stocks are likely to test, if not break, early-October lows.

Click here to enlarge

Chart Analysis: The break below strong weekly support in Molycorp (MCP) last summer (line a) triggered a wave of heavy selling that took prices quickly to the Starc- bands and support in the $29-$30 area.

  • The negative candle formation suggests a test of the recent lows, if not a drop to the weekly Starc- band at $21.45
  • The relative performance, or RS analysis, broke support (line b) in September, starting a pattern of lower lows
  • The new low in the RS last week suggests prices will also break below the last lows
  • The weekly on-balance volume (OBV) broke support, line c, in July. It now shows a pattern of lower lows, line d
  • The daily OBV (not shown) is negative, as volume was high on Friday
  • First resistance now stands at $36-$38

Avalon Rare Metals (AVL) also reversed last week to close on the lows. The stock traded as high as $10.11 in April and has since had quite a slide. It looks as though the rally from the early-October lows is over.

  • There is next support at $3.00 and then stronger support at $2.29. The weekly Starc- band is now at $1.63
  • The RS dropped below its weighted moving average (WMA) in early May and then violated its uptrend (line 3) in late July
  • The OBV has stayed flat over the past several months. It moved back above its weighted moving average last week with the higher close. It should be noted that AVL closed on the week’s lows
  • Volume was not overly heavy on Friday
  • Initial resistance now stands at $3.75-$3.91

Rare Element Resources (REE) closed below weekly support in June, line a. The stock then moved sideways for six weeks before another wave of selling took REE to and then below the major 61.8% retracement support at $7.60.

  • REE tested long-term support from 2009-2010 in the $4.30 area on the early-October drop
  • The weekly Starc- band is now at $3.10
  • The RS analysis confirmed a new downtrend in July when it violated support at line b. It now shows a clear pattern of lower lows and is well below its declining weighted moving average
  • The weekly OBV has stayed below its weighted moving average since July but has been in a narrow range. There is stronger OBV resistance at line c
  • There is a strong band of resistance in the $7.50-$9.34 area

What It Means: The weekly analysis of the key rare earth stocks suggests that another sharp decline is likely before year end. Though this could be star sector sometime in 2012, the weak charts and negative RS analysis makes current risk high on the long side.

After such a significant decline, I would expect to see some basing before a significant new uptrend could be formed.

How to Profit: For those who are long any of these three stocks, have stops in place, as a drop below the October lows would not be surprising.



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