Monday, March 5, 2012

Rare Earth (shares) Supply Increasing

Last year, rare earth stocks were on a tear, as rare earth prices rose parabolically.  Even AMEX-listed Rare Element Resources, Ltd. ($REE) a company that has never mined anything, and which some have alleged would never mine anything, participated in the rally, reaching a market cap of around $750m amidst the fervor of soaring rare earth prices.  Since then, things have come back down to (less rare) earth.

Here is the daily chart for REE showing a fairly well defined downward channel.

Even the big move up in the beginning of this year only reached the top of this channel, and it is likely that much further downside can be expected from here.  Just to give a balanced picture, an inverse head and shoulders pattern could potentially be forming in $REE, as shown in the following chart:

The inverse head and shoulders pattern, if correct, would suggest that a low in the $4-5 range could be tested, before another encounter with the neck line around $9.  This would set up a potential price target of $15, based on measuring from the head to the neck line, which would set $REE up for a test of all time highs.

However, this scenario seems unlikely, given how overheated the rare earth market got last year, it is unlikely to do so again.  $REE has been good at burning shorts that got overextended after sharp drops (as happened in October 2011 and January 2012).  But beyond that, there does not seem to be much appetite for buyers to take the market cap back up to the practically unjustifiable highs of 2011.  $REE seems to be a $0-$1 stock that has benefited from a frenzy only marginally more reasonable than the famous tulip bubble.

The real powerhouse in the sector, Molycorp (NYSE: $MCP), has actually performed worse relative to $REE recently, hugging closer to the bottom of its downward channel.

MCP actually mines, and has a source of revenue.  In a sense, its $2b+ market cap makes a lot more sense than $REE's market cap that is 10x smaller.

MCP's price action suggests rare earth stocks could have some room to run in 2012, as it has not attempted a run at the top of the channel for a while and is nearing oversold on RSI again after its recent touch of the bottom of the channel.  So if MCP runs, this could give a bit of a boost to REE as well.  But ultimately, this sector appears to have peaked.

Disclosure: No Position

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