My Coal Short
Take a look at the KOL (coal stocks ETF) chart (click to enlarge):
KOL has plunged through its up-trend line (blue) on huge volume, and formed a classic bear-flag pattern (pink). The enormous down-side volume indicates that the big money wants O-U-T out of this ETF.
I am playing this pattern with some KOL August $50 puts (KOLTX). I am in at $2.75, so I’m under water at the moment. However, since I don’t know anything about the coal companies, I am playing very small. A 100% loss on this trade would only have a tiny affect on my annual performance, which currently stands at an incredible 72.66% (in my trading account where I have these puts.)
Why would I trade something I have no fundamental knowledge of? Because that’s what technical traders do! However, I am not a pure technical trader and prefer to do fundamental analysis also, but this particular trade is purely technical. I also did very well with my oil bull-flag analysis. When I made that chart, everybody just knew that oil was done.
These flag patterns are very reliable. Take a look at my Bear Flags Flying! post from June 21st. Here is a quote:
“Expiration? FOMC meeting? Who cares! The bear army is marching!”
How’s that for a prediction!
Flags are “continuation” patterns, which mean that they appear within a trend, as opposed to a reversal pattern which signals the end of a trend. So, in KOL’s case, the appearance of the bear-flag indicates that the larger trend is still down.
Of course, no indicator or pattern is infallible. For example, KOL could break higher if the plunge down was caused by margin-clerk selling after a big fund blew up. We will see. Of course, even if that were the case, no technical trader on the planet will be going long KOL while the bear-flag pattern is intact.
