Sweet Spot for Rare Earth Stocks
Source: Forbes, Tom Aspray (6/6/11)
"There may be a good buying opportunity presented this month."
The rare earth element (REE) stocks became the focus for many investors beginning late last year, though most of which had been on a tear for awhile. All peaked in April when the reality of China's rate hikes and ensuing economic slowdown dampened enthusiasm for the stocks.
After an initial surge of negative sentiment following their peak, and now that they've declined further, some analysts are again turning positive. Technically, REE stocks look poised to further correct to the downslide over the next few weeks, stopping out the recent buyers.
The sector's leading stock, Molycorp, was hit by disappointing earnings in May, and this further pressured all REE stocks. From its highs in April at $79.16 to the May lows at $55.82, MCP was down 29.4%. This likely discouraged those who bought early in the year.
One more drop below the May lows could take the leading stocks to my target buying zones. Rare Element Resources Ltd. (TSX:RES; NYSE.A:REE) is a $500M company which has been in a broad range with resistance at $16.55–$17.92 and support at $9.90. The 50% support level from last summer's lows is at $9.50, major 61.8% support stands at $7.62 and weekly OBV did confirm the highs early in the year . . .initial resistance is in the $13 area with much stronger resistance at $14.90–$15.
The correction in these stocks doesn't look complete and sentiment supports that view. For those who want to establish a small position in this sector, there may be a good buying opportunity presented this month. If these stocks continue to move higher, instead I's recommend waiting for a new trend to develop before buying.
How to Profit: Long RES 50% at $9.77 and 50% long at $9.29 with stop at $8.83 (risk ~7.3%). Above $13.20, raise stop to $9.56.