Lithium and Rare Earths Perking Up

Thursday, 16 January 2020
Melbourne, Australia
By Murray Dawes

In my Week Ahead update video on Monday, I took you through the current technical set up in the Van Eck Rare Earth ETF [NYSE:REMX].

The big picture is finally showing signs of life after a multi-year bear market. Check out the video if you are interested in seeing a detailed analysis of how markets change trend and why I think an uptrend could develop in rare earths if we get a strong close in REMX this month.

Lithium prices have also seen a sharp rally recently and beaten up lithium stocks have been spiking sharply.

Orocobre Ltd [ASX:ORE] has leapt over 70% in six weeks! It jumped from $2.30 in early December to a high of $3.96 this week. It is currently trading at $3.66. Pilbara Minerals Ltd [ASX:PLS] jumped 64% in five weeks from a low of 25 cents in mid-December to a high of 41 cents this week. It is currently trading at 36 cents.

Some of the less advanced projects are also seeing buying interest with AVZ Minerals Ltd [ASX:AVZ] flying 40% this week. An announcement about their intention to refurbish a hydro electric power station near their enormous Manono deposit was probably behind some of the buying, but there is definitely a large, sector-wide buying frenzy going on.

There was some big news in China over the weekend that could explain the move. As reported on the Smallcaps.com.au website, ‘the country’s Minister of Industry and Information Technology Miao Wei reportedly told senior auto industry executives at the EV100 forum in Beijing on Saturday the government will not cut subsidies for new energy vehicles (NEVs) any further in July 2020.

The signing of the US–China trade deal puts to bed some of the uncertainty markets have been facing also. Chinese EV stocks have been rallying strongly on the news and Tesla Inc [NASDAQ:TSLA] has taken off like a rocket over the last few months.

Tesla Goes Vertical — Telsa Monthly Chart


Money Morning

Source: Tradingview.com

[Click to open in a new window]

Lithium stocks have been under extreme pressure over the last few months. It became apparent that a supply overhang was developing due to the delays being experienced in China setting up new conversion capacity to convert lithium rich spodumene product into battery grade lithium.

PLS decided to lower production from its Pilgangoora mine as a result and their shares plummeted.

Markets

US markets edged higher overnight with the Dow Jones up 0.3% to 29,030. The S&P 500 was up six points to 3,289 and the NASDAQ was up a few points to 9,258.

European markets were mixed with the German Dax down 24 points to 13,432 and the FTSE 100 up 20 points to 7,642.

In Asia, the Japanese Nikkei 225 is up 14 points at 23,931. The Hang Seng is up 170 points at 28,946.

Gold is treading water around USD$1,555. WTI Crude Oil prices are finding a bit of support after the big sell-off last week and is holding around US$58.00.

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Most investors agree that the long-term picture for lithium and rare earths looks good on the back of the worldwide shift towards electric and hybrid vehicles.

The strategic significance of rare earths is another reason to like them long-term as the US tries to diversify supply away from China.

But as always, the market never makes it easy. Nothing goes up in a straight line. Various bouts of volatility shake traders out of positions and test the patience of even the most sanguine investor.

The supply bottlenecks were always a short-term issue that would be resolved at some point. The story of the next 20 years remains one of continued rising demand for lithium and rare earths as the revolution in automobiles gathers pace.

It seems clear that there are plenty of investors who have been waiting on the sidelines for their opportunity to pounce.

There is no guarantee that this current flurry of buying will mark the low in the bear market in lithium and rare earths. There may be more selling to come, but my ears are now pricked up waiting for the right buy signals.

A monthly buy pivot in the key stocks will be interesting to me because they have been testing major support levels within long-term uptrends.

The short-term oversupply issue could be giving us a gift of an entry point into stocks that should see great long-term growth. I have thought that I missed the boat in them a few times, so I won’t be sitting around twiddling my thumbs this time.

I don’t think the right approach is to chase them higher right now, though. There is still a lot of weight on the stocks. By that I mean there are plenty of investors who are long and wrong and waiting for a chance to get out of their positions.

When you see a hot sector implode as we have seen in rare earths and lithium over the past few years, you can be sure there are plenty of people who chased prices higher during the hype phase that didn’t get out as prices fell.

They will be sitting on big losses and praying the market will make them whole again.

The frustration from sitting on big losses usually ends up leading people to dump their position on a short-term spike in prices. The relief from seeing huge losses halved, for example, is too tempting. They have seen prices fall over so often that they don’t want to see the same thing happen again, so they sell as soon as they get a chance.

That’s why you usually see long grinding sideways motion in prices after a big sell-off. The technical idea of a rounding bottom is based on the above.

That’s why my strategy of waiting until I see a concrete sign of a shift in momentum from support zones works so well.

I don’t buy as soon as the shift in momentum is confirmed. Instead, I wait for another bout of selling and buy in the buy zone of the wave created from the lows.

That’s where the best risk/reward is.

It can be hard to do because the chart ‘looks’ bad there. You have to have blind faith in the overall trading plan and act when you’d prefer to wait. To get the best entry points you have to buy weakness or sell strength.

It’s incredibly hard to do but it gives the best outcomes.

I’m not talking about catching a falling knife. I don’t do that.

I have the monthly or quarterly buy pivot on my side. I have long-term confirmation that the momentum is shifting and I buy on weakness once that box has been ticked.

The market is the master of shaking bulls and bears out of their positions no matter what’s happening. If you want to trade the markets effectively, you need to get in the flow of that process and use it to your advantage rather than being a victim of it.

Regards,

Murray Dawes,
Editor, Alpha Wave Trader