Rare Earth Stocks Close To Potential Breakout

Rare earth producers have consolidated for nearly 3 months after the sharp, but brief buying frenzy that took place at the very beginning of this year after the Chinese announced that they would cut export quotas for the year of 2011. Since then, China has continued to indicate that they not only will cut export quotas but they will also increase import quotas. Regardless, rare earths stocks have been subdued including the flagship rare earth company Molycorp who have yet to make new highs this year even after their monster earnings report a few weeks ago.

Based on the technical activity and the Chinese import/export situation, it looks as if rare earth producers could be breaking out to new highs in the not too distant future.

Several technical indicators show that Molycorp is close to a bullish breakout above the previous resistance level of $62.50. First I see a test of resistance resulting in a temporary double top followed by a pullback to $55 or slightly lower, then a more controlled test and ultimately a breakout to new highs.

We have been overbought for a week or so and have broken through 2 resistance levels already. Today MCP gapped above resistance which tells me that the real sellers aren’t shorting this stock until it inches closer to resistance. I would be a seller at $62 as MCP is hitting an RSI peak, resistance on the MACD, and has already been overbought leading up to today. I would advise a strong buy at $55. The 20, 26, and 50 MA’s are bullishly crossing over and moving higher, the volume is certainly behind this move and there is strong support at $55. The 20 and 26 MA will provide added support as price activity consolidates after hit a ceiling at $62.

MCP is leading the charge in the rare earths sector and other leading rare earths producers are showing the same chart patterns despite not yet having the cash flows that Molycorp does. I think that we hit a short term top here followed by the next leg up.

Many of the rare earth juniors had a huge run at the end of last year but most have consolidated YTD even though there was plenty of reasons to be bullish based on the news reports regarding the sector. They’ve been stuck in a trading range for too long and the train will be leaving the station very shortly.

Take a look at how they’re performing:

Triple top coming up shortly for Lynas, but strong MA support will be there for buyers to come back into.

…And for Stans Energy – an extended and boring consolidation period after a monster run backed by a clear decrease in trading volume.

You can call the chart in Great Western a potential triple bottom or an inverse head and shoulders reversal. Again, textbook volume decreased during this consolidation as is the case with Stans Energy.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

4 Responses to Rare Earth Stocks Close To Potential Breakout

  1. I’m not so sure that China has really worked out where rare earth is going yet, so it might be a bit early to jump the gun and start following what is still a chaotic market. Interesting read though, thanks.

    • aaronbasile says:

      What do you think about their export quotas and them stating that they want to become net importers?

      • There are certainly rare earth deposits that haven’t been exploited elsewhere in the world – mainly due to the difficulties of non-polluting extraction, but whether there’s enough for China to become a net importer is a taxing question.

        In terms of export quotas – these are a natural consequence of increased local demand, and decreased production capacity as the country cleans up its act. It’s hardly a sensible thing to cripple your own industry in favour of ensuring the profits of another country’s is it?

        • aaronbasile says:

          Oh I’m well aware of how plentiful REE deposits are. It’s just that even with government funding it would still take 5 years minimum to get a project online and that’s assuming that you can comply with environmental standards and the area you decide to mine in doesn’t have excessive political risk.

          There may be long term solutions and/or alternatives to rare earth technology but the opportunity I see here is extremely enticing and I’m not shy to get my feet weet while using a prudent stop loss.

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