Commodity Stocks With Buy Signals (CNX, BBL)

These three commodity-related stocks have soared in the last year. They are moving higher within well-defined trend channels, which provide some potential trade areas. Near the bottom of the channel (support) is where buying should be considered, while near the top of the channel (resistance) is where to look for an exit. Trading is not quite that simple, though. Ideally, traders will want to see if the market stalls or bounces near the bottom of the channel, and then use that to determine the exact entry. The three charts below provide an example of this approach.

CONSOL Energy Inc. (CNX) has been trending higher since the start of 2016 and is moving within a rising channel (the most recent one) since May. Channel support is near $17.75. The price fell to $17.02 briefly on Jan. 3, but then quickly rebounded indicating there are buyers stepping up in that region. Buy near $18 with a stop loss below $17. The upside target is $22.75. This target is near the top of the channel and is in alignment with the size of the rallies that have been occurring over the last several months.

BHP Billiton plc (BBL) has also been rising all year. Based on the rising channel, support is expected between $31 and $30. On Dec. 23 the price declined to $31 and has since bounced back above $32. Therefore, $31 has so far provided support in the area expected. Buy below $31.70 (will require a bit of a pullback from the Jan. 6 close of $32.68). While $31 has triggered a bounce, a decline into the $30 area is still possible. By entering between $31.70 and $30, a stop loss can be placed below $29. Alternatively, a trade can be taken near $31.70 with a stop loss below $31. If the price falls below $31, the trade is exited for a small loss, and if the price stabilizes around $30, then another entry can be taken. Exit long trades near the target of $36.75.

Conocho Resources Inc. (CXO) bottomed at $69.94 in January 2016 and hit a high of $147.55 in December. That high was just below the multi-year high of $148.61 (which could be at least a short-term resistance area over the next several months). The most recent trend channel, which extends back to July, indicates support between $130 and $128. The stock closed at $135.60 on Jan. 6, so the price will need to decline a bit further before reaching this support area. If the price consolidates (moves sideways for at least a few days) in the support area, and then moves back above the consolidation high, that is a buy signal (assuming the buy signal occurs near the $130 mark). A stop loss can be placed below the consolidation low. Exit long positions between $148.50 and $149. This is the top of the channel and also respects the high from 2014 which could act as a resistance area.

The Bottom Line

These commodity stocks are rising in well-defined trend channels. The trendlines are not trade signals; rather they simply indicate areas to watch. If the price does indeed bounce or consolidate at these levels, then there is a potential buying opportunity because the price is confirming that buyers are stepping up in that region. Place a stop loss below the recent swing low (or consolidation low), and look to exit near the top of the channel. These channels have been in play for most of 2016 and are providing yet another buy signal. Only risk a small percentage of account capital on any single trade, as the price can reverse lower at any time (For further reading, see: Optimal Position Size Reduces Risk).

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