The Technical Analysis Report: Rare Earth Metals (February 17, 2010)

There’s been much talk of late about China’s moves to crimp its exports of rare earth metals. Producing roughly 95% of the global supply, the move has inspired a line of investment thought arguing that rare earth metals are the place to be for the next commodity boom.

The theory is predicated as much on China reducing supply as it is on increased demand from the burgeoning green economy, as rare earth metals are key components in hybrid cars, windmills and other advanced green technologies.

While rare earth metal projects are notoriously time consuming to develop, there are a number of Toronto-listed companies that stand at varying degrees of the exploration spectrum.

Since reaching new highs in September of last year, the group of companies have traded in a slightly downward or flat consolidating pattern. Technicians monitor consolidating patterns closely for signs that the stock will break through resistance or below support levels.

Three juniors, however, stand-out from the crowd due to some interesting technical aspects.

The first of those companies is Avalon Rare Metals (AVL-T).

The Toronto-based company’s flagship project is the Nechalacho Rare Earth Element deposit located in the Northwest Territories, Canada which it describes as an advanced development stage project. Avalon also owns four other rare metals and minerals project in Canada, three of which are at advanced stages of development.

The most striking thing about Avalon’s one year chart is the strong five wave pattern formed during its upswing. The pattern coincides nicely with Elliot Wave Theory which postulates that all securities move up in a five-wave pattern (three up and two down), followed by a downward correcting three wave pattern (two down, one up).

If the stock is unfolding according to Elliot Wave’s strictures – which is notoriously difficult to discern due to the subjective nature of what exactly constitutes one wave – it would appear to be in the third wave phase of the three wave downtrend. This would indicate that a reversal is on the way that could see the stock moving up to new highs.

Moving on to less subjective technical indicators, the MACD chart for Avalon is the most bullish indicator for the company’s stocks as the MACD line has recently crossed the Signal line from beneath.

Mirroring the MACD’s bullish reading is the DMI chart which shows the +DI line to have crossed the -DI line from beneath, which is short-term bullish. The ADX line has moved downward and has reached a reading of 20. Readings of less than 25 indicated that the equity is not in trending. In the case of Avalon this can be read as bullish, as since the stock broke through the $4.00 marker in September of last year, its share price has been moving downward. With the ADX line now not confirming a trend, this can again be read as a sign that a reversal could be coming.

The next company to be looked at is Rare Earth Metals (RA-V) which has early stage exploration projects in Eastern Canada, Ontario and Alberta.

After a significant spike that coincided with its peers, Rare Earth Metals broke the mold in late January, as unlike its peers, the company’s share price managed to test the resistance of the September highs.

Since then its share price has fallen off more violently than its peers, making Rare Earth a good candidate for risk taking investors that crave the alpha that can come from higher volatility stocks.

Currently Rare Earth Metal’s shares are riding the bottom band of the Bollinger bands which is a bullish. Also positive is the Slow Stochastic chart which is firmly entrenched in the Over-sold range with the K line only just recently crossing the D line from beneath – a bullish reversal signal.

The Williams %R chart is also bullish as it sits in the Over-sold range.

Less positive is the MACD line. Firstly the MACD line is trending downward and parallel to the signal line and has not made a move towards the signal line. A bullish indicator is given only when the MACD line crosses the Signal line from beneath. Also of some concern is the pattern of divergence that the chart shows as the re-testing of September highs in January was not supported by the MACD chart.

The last company to be examined is Hudson Resources (HUD-V) which has the Sarfartoq Carbonatite Project – a 1,300 sq. km. property in near Kangerlussuaq, Greenland.

Greenland has grabbed some attention on the rare earth metals front recently thanks to Australian-based Greenland Minerals & Energy’s (GGG-A) discovery of the massive Kvanefjeld deposit.

Like Rare Earth Metals’ chart, Hudson’s also shows significant divergence from its peers.

In Hudson’s case, unlike other rare earth metal juniors, its shares did not spike significantly in September of last years. Instead its share price built up steady momentum until late September when it went into a sideways consolidation pattern. It broke out of this in late December when it spiked to a new all time high of $1.31 before falling back to the 75¢ to 85¢ range.

Significantly, Hudson’s share price is the only one not to break below a support line that can be drawn from June of last year until the present. If, however, its shares were to break below the 70¢ a downward reversal could be imminent. The next support would come in around the 50¢ level.

As for the company’s quantitative indicators, they are in the main, pointing short-term bearish.

A look at the DMI chard shows that the +DI line is approaching the -DI line from above (bearish), the ADX line is below 20, instilling less faith in the upward trend.

Both the Slow Stochastic chart and the Williams %R have recently made bold moves out of the Over-sold range and are trending upwards towards the Over-bought range.

As for the MACD chart, the MACD line approached the signal line from below only to be halted once it arrived. The two lines have been moving parallel since then, meaning a break above or below is equally likely.

It would be prudent to watch this stock in the short term and look for better entry points.

The author holds no shares in any of the companies mentioned in this article.