Long Calls on Arch Coal Inc. (ACI)

The coal market should improve over the next year because of demand and declining inventories

   

One way to warm things up this winter is to use coal stocks — but don’t be a Scrooge about it.

Recommendation: Arch Coal Inc. (NYSE:ACI)

The trade: Buy the January 6 calls for 0.76 or less.

The rationale: President Obama’s recent re-election and continued desire to have the United States move to more alternative energy sources has not been kind to coal. In fact, the last couple of years have not been kind to Arch Coal’s peer stocks like Peabody Energy (NYSE:BTU) or Alpha Natural Resources (NYSE:ANR) as their values have substantially declined. Is coal an energy fuel of the past now? Natural gas futures have slowly been rising, which has brought some customers back to coal. The biggest wild card is the potential of a warm winter, which would lower natural gas yet again.

Several analysts have commented that the coal market should improve over the next year because of demand and declining inventories. Arch Coal in particular plans to take on $600 million more in debt, but plans to reduce its overall debt soon which should make investors happy.

Looking at ACI’s chart, the stock has been in decline for a good year and a half. But since the end of July, the stock has tried to reverse its fortune. The stock has started an uptrend making higher pivot highs and higher pivot lows consistently and trading in a channel. Right now stock is at the bottom of the channel which acts as support and has room to move up. Regardless of the recent news, if the stock continues to follow its pattern, there is a good probability the stock may head higher again. A recent pivot low around $6.19 should be watched for a break in the pattern. The daily 200 simple moving average which is hanging around $8 could act as resistance on a move higher. Let’s hope its cold for the holidays!

 

As of this writing, John Kmiecik did not hold any of the positions mentioned above.

 


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