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This Beaten-Down Coal Stock Could be a Double-Digit Gainer

There are a few sectors that have been breaking investors' hearts for some time. Natural gas and gold instantly come to mind. Coal miners also fell into this category, but when nobody was looking, the sector put in a nice four-month rally.

 

Cliffs Natural Resources (NYSE: CLF) is an international iron ore and coal miner. While it has done well since the middle of this year, its long-term chart is indeed painful to look at. Peaking above $100 in early 2011, it began a long descent to a low of $15.41 in July. Along the way, there were plenty of false upside breakouts that created false hope and real losses.

CLF Stock Chart

But right now, the chart shows a possible inverted head-and-shoulders formation. Marked by two lows (the shoulders) on either side of a lower low (the head), it suggests that the trend is in the process of turning from down to up. Resistance, called the neckline, is found at the line connecting the highs of the two shoulders.

Currently, the neckline is in the $28 area, which is about 9% above recent prices. This means that the pattern is not yet completed, and we must wait to see if the stock will break out to the upside or fail.

Technically, indicators such as momentum and cumulative volume are much improved. And though overshadowed by the hot social media stocks of today, CLF has been outperforming the S&P 500 since the summertime. The bottom line is that the odds favor a continuation of this strength for a few more weeks until the neckline is reached.

There is one more technical factor suggesting strength. Since August, the stock has been in a sideways trading range between roughly $19.95 and $25.70. The size of the range is 5.75 points, and on a breakout above the top of the range, we could see a move to $31.45. To be a bit more conservative and use a round number, let's put the target at $30.

The neckline of the head-and-shoulders pattern should rise to that area before the year is over, and the combination provides a compelling price target. Even if the long-term bear market is not over, grabbing this double-digit percentage gain would be a nice trade.

Recommended Trade Setup:

-- Buy CLF at the market price
-- Set stop-loss at $23.75
-- Set initial price target at $30 for a potential 17% gain in eight weeks