In June, I recommended buying uranium — specifically Cameco (CCJ) and the CCJ January 2013 20 calls as they traded at $2.50 a contract.
I told you upside was imminent.
I was laughed at, ridiculed for making such a call…
No one wanted to hear that our R-4 MACD and DMI triggers just gave us a buy cross, or that the stock found solid support after consolidating.
“Who in their right mind would buy such an unfavorable sector, post-Fukushima?” asked one reader.
Here’s how the stock has done since that call:
Cameco ran from $19 to more than $22.50, an 18% move in the stock.
The January 2013 20 calls ran from $2.50 to more than $4 — a 60% gain over the same time.
Chesapeake Energy
I reiterated a buy on Chesapeake Energy (CHK) as natural gas began making a strong comeback to the upside just days later.
I had initially recommended a buy around $15 a share as CEO allegations and company wrongdoings made headlines.
Here’s how the stock has performed since my initial recommendation:
It was another great call made shortly after the stock crossed below the lower Bollinger Band, coupled with a bullish move off oversold Williams % Range, MACD, and DMI.
Still, investors didn’t want to hear the stock was oversold and ready to bounce…
They didn’t want to hear the logic behind buying at extreme lows. They wanted nothing to do with it.
And we were able to cash in when others were running scared.
The Next Opportunity: Coal
At the end of May 2012, Goldman Sachs foolishly upgraded Peabody Energy (BTU) from Neutral to Buy with a $37 price target.
At the time, the stock traded around $26.
But I knew further downside was likely…
I knew coal fundamentals were weak because of declining coal prices. I knew it’d be difficult for these stocks to make any money in this operating environment. And I knew many of the coal companies would see lower profits.
Still, based on Goldman’s call, naive investors bought.
I, on the other hand, bucked the trend and went short the underlying stock.
I recommended readers ignore the upgrade.
The stock would fall from a high of $26 to less than $21 — a 19% profit on the short side — before rallying off lows to more than $26.
And while we missed that eventual bounce from below the lower Bollinger Band, the latest moves and recent news give us two ways to trade coal…
Near-Term Coal Trade
Near term, coal stocks are likely to pull back after crossing that upper Bollinger Band.
We also have an overbought read on Williams % Range, and the latest spikes in MACD and DMI are unsustainable.
It’s likely stocks such as Peabody (BTU) will pull back from the runs.
This can be played by either shorting the stock or by buying an August 26 put.
Long-Term Coal Trade
Coal stocks were absolutely obliterated in the first half of the year on falling U.S. demand.
But they’re just now making a comeback on strong demand from other parts of the world…
Gregory Boyce, CEO of Peabody Energy (BTU), explains Chinese demand has been growing sharply in recent months. Demand for coal is expected to reach 285 million tons in China this year.
And China’s not the only nation that’s hungry for coal…
Boyce expects global coal use to run 25% higher by 2016.
Coal consumption is expected to explode in India as it continues to develop thermal power generation plans.
Europe is burning coal at its fastest pace in six years. European demand grew 3.3% last year as natural gas sales fell 2.1%.
“Coal will continue to remain in the money in Europe because it’s more competitive to burn than gas,” says Barclays.
I strongly believe coal prices have found their bottom — with no place to go but up.
That’s why I’m buying coal stocks at depressed levels… and I’m recommending you do the same.
On the next BTU stock pullback, I’d buy the underlying stock as well as the January 2013 26 calls.
Buying long-dated calls (just as we did with CHK and CCJ) limits your exposure to time decay issues.
Stay Ahead of the Herd,
Ian Cooper
@IanLCooper on TwitterIan Cooper has been trading stocks and options for 12 years. He contributes options, stock, and energy commentary to Wealth Daily, Wealth Wire, and Options Trading Pit. He’s the Coach behind Options Trading Coach, a beginner’s guide on how to trade options. Ian teaches thousands of loyal subscribers the many ways to be profitable from options rather than simply buying stocks alone. For more about Ian, take look at his editor’s page.
