James River Looks Good… Technically Speaking
By Graham Summers
May 14, 2007
Last Wednesday, we returned to an energy-stock anomaly: James River Coal… the one energy stock that has managed to lose more than 90% of its market value in the last two years.
After posting losses and missing earnings estimates seven out of its last eight quarters, JRCC finally bottomed out in early January 2007. Nothing had fundamentally changed about the company's business. Shares had simply fallen from $50 to $6, and there wasn't much money to make by selling the company short anymore.
Since that time, the stock has rallied over 50%. Again, nothing fundamentally changed about JRCC's business. Looking at the company's financials wouldn't have told you much. JRCC had been extremely undervalued for more than a year, trading at times for as little as 1/70th of its reserves' value.
However, from a technical standpoint, JRCC's chart made it clear the stock was oversold and ripe for a rebound.
Timing a stock's bottom is guesswork at best. Which is why I like to use a stock's 50- and 200-day moving averages (DMA) as guidelines for its momentum. If you're unfamiliar with these terms, a 50-day moving average is simply the average of the stock's previous 50 closing prices. Same with the 200-day moving average.
If a stock has been trading down for some time, its moving averages can be excellent gauges for how strong its rebound or upward momentum is when it finally bottoms out. If a stock stages a sustained rally above its 50-DMA with little difficulty, then it has strong upward momentum. However, if a stock breaks above its 50-DMA and then falls back below it again soon after, you know that it's not quite ready to run.
Looking at JRCC's chart of the last two years, you can see that mid-March was an excellent time to buy JRCC shares. The stock broke above its 50-DMA for the first time in nearly a year.
However, I wouldn't blame you if you ignored this development. JRCC shares had plummeted so many times in the previous two years that most investors would take some convincing to buy back in.
Last week, JRCC posted first-quarter earnings. The company still posted a loss, but it beat analyst estimates handily. Between this and a subsequent analyst upgrade from Goldman Sachs, JRCC jumped 25% from Monday through Friday. If you bought following our coverage of the stock on Wednesday, you saw gains of 10%-15% in one day.
Which brings us to today…
JRCC shares exploded through their 200-DMA of $10.43 last week. If they maintain their current level in the next week, we should be in for a strong sustained rally. However, if JRCC shares fall back below their 200-DMA, the upward momentum has cooled and we could very well see more bumps in the near future.
Watch closely over the next week. This stock has all the hallmarks of a breakout stock. And a sustained rally above the 200-DMA would be confirmation that greater gains are to come.
Good trading,
Graham
