Resurgent Materials and Miners

The following is an excerpt from my latest Weekly Strategy Session, which I published earlier today for members (12631 subscribers receive the Strategy Session each weekend, at no additional cost). 

This particular subsection is focused more on the educational component of the Strategy Session. The other parts comprise more actionable trading ideas and broad market analysis. 

The Resurgent Materials and Miners: Promising But Still Only Short-Term Trading Vehicles. 

Many terribly ravaged miners and materials plays over the past few years gave yearning bulls a reprieve last week, as the group noticeably outperformed the rest of the tape. While there are promising signs of them forming potential major bottoms, the truth of the matter is that you can expect that, even if proven correct, the bottoming process is going to be a volatile one, filled with random and sizable gaps for the next few weeks or even months.

Headed into this week, the short-term momentum can easily continue higher, which is why I view them as quick trading vehicles for now, more than anything else. Many of these stocks are also heavily-shorted, such as Walter Energy, below, a coal miner.

Walter may very well be symbolic of the entire collection of miners at this point in time. The short-term squeeze is on, and bulls are hopeful for a major double-bottom, which I have highlighted for you with the lower light blue line on this daily chart.

However, double-bottoms are often overrated chart patterns. Remember, we are still dealing with stocks in established and powerful downtrends. The longer-term moving averages remain clearly declining, and if this is going to reverse you can expect tons of backing and filling after the initial rally off the bottom in the coming months.

A main reason why the double-bottom is overrated is because to presume it is valid runs counter to the overall trend, especially without confirmation. And confirmation for this pattern is often far more difficult than with other patterns. Here, Walter would need to close and hold above the $14.75 highs from July in order to confirm this double-bottom. That may very well happen, and this past Friday was indeed a promising session.

But for now the materials and miners remain high beta short-term trading vehicles for aggressive traders, willing to take on the extra risk of stocks in downtrends, to play for a counter-trend exuberant rally.

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