By Chris Vermeulen

We all want new and exciting electronic gizmos and gadgets for the holiday season. Unfortunately they have the tendency to lose almost all their value within weeks. But what if you just got a lump of dirty old coal in your stocking?

The only individuals who would appreciate a gift like coal would be those forward-looking investors who see major opportunities before they become the next big movers and headline news.

Knowing how to spot Stage 1 patterns is one of the most important bits of information you need to know as an investor. My main focus is on exchange-traded funds (ETFs). They provide lower risk but are very powerful when applied to individual stocks.

Coal and coal stocks have been out of favor for almost two years now. But these unwanted and hated shares may soon be owned by the masses, or at least by traders and investors. (A few weeks ago on Minyanville I talked about the four stages all investments go through and which patterns you must be able to spot in order to make huge money investing while having very limited downside risk in How Traders Get Wealthy Playing Apple, RIM, and Gold Stocks.)

In summary, trade with the NYSE big board, and only focus on buying stocks, ETFs, etc. as they are coming out of a Stage 1 Accumulation Basing Pattern. This puts the odds greatly in your favor for not only winning the majority of your trades, but for generating above-average returns.

The Big Board -- NYSE -- weekly major stock market trend
This chart formed a reversal candle last week, which points to lower prices. It's likely we see a one- to two-week dip before buyers step back in. Until then, individual stocks should pause or form mini bull flags until the sellers are finished and buyers step back into risk on assets (equities).



Coal sector ETF showing Stage 1 basing pattern
Coal stocks have been bouncing bottom for some time, and if you did not review the Stages Report using the link above then do so now so you know what to expect in detail. Market Vectors Coal ETF (KOL) is a basket of coal companies and is starting to show signs of a new bull market. A breakout and close above $26 should trigger strong buying with the potential of a 21% gain before it hits my first price target. This could go way past that, but one target at a time, folks.

Naturally I would like to see a bull flag or pause in KOL over the next couple weeks, then look to get long using the pivot low of that pause/bull flag as my protective stop. I'm not jumping in here as the broad market looks ready to correct and three-quarters of stocks follow the big board, which will pull KOL down.



Alpha Natural Resources -- my top coal stock pick

I pointed out Alpha Natural Resources (ANR) at $7.50 at the beginning of December to followers as it was the best-looking coal stock I could find. The two key indicators, price and volume, were clearly pointing to higher prices, and the potential gain -- even if it was just played up to the Stage 1 Resistance Level -- still netted a 30% move. The crazy part is that there is the potential for a 100% rally to my first price target.



You want gizmos or coal in your stocking?
In short, I really like the coal sector for the first quarter of 2013. I'm not too worried about the fiscal cliff as it's not the end of the world, and the U.S., along with most other countries, are all bankrupt together, in my opinion. New rules and ideas will be implemented and life and business will continue.

I am expecting stocks to continue sideways or higher into May at which time a serious correction could take place. But not to worry as we take things one week at time. I will be adjusting my outlook accordingly.

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