The rules for trading a stock’s uptrend are simple:

•    Start drawing the trendline at the stock’s lowest low. Connect that to the next lowest point preceding a new high.
•    Each time a new high is made, redraw the trendline to touch the lowest low that precedes it. Traders are seeking the angle that most accurately reflects the stock price’s rising bias, and therefore false breaks of the trendline should be taken in stride rather than being considered an end to the trend.
•    Purchase the stock on the third touch of the trendline.
•    Stop adjusting the trendline when the stock ceases making new highs, and extend it into the future at that angle.
•    Close the open position when the price breaks beneath the trendline.

The dominant bullish trendline for Centennial Coal Company (CEY) has been subjected to tectonic stress levels in the last few months. First came news that Banpu PCL, Thailand’s top coal mining company, was purchasing a 14.9% stake in Centennial. This hit the wires just as the stock’s price action was touching the bullish trendline and testing beneath it, and the news sent the price surging higher in an 85¢ gap on opening on 6 May.

Then came the Rudd government’s proposed resources profits tax, which, along with the increasing jitters in global financial markets, sent most mining companies’ stocks tumbling. This included CEY, which blasted through and beneath the trendline, finally stopping at a previously established support level at roughly 3.60. The stock’s price action didn’t return above the bullish trendline until early June, and then the trendline’s support proved shaky, as shown on the analysed chart, below:

Just as fundamentals seemed to be settling, Banpu announced a takeover offer for Centennial on Monday, 5 July, valued at $6.20 per share. This was obviously higher than the current share price, and despite the necessity of awaiting agency approval, the price surged 31.9% in that day’s trading, closing at 5.83.

Clearly CEY’s trendline was broken during May and June, and perhaps it can no longer serve as a direct trading tool. But traders should consider leaving trendlines on their analysed charts even after they’re broken. So many other traders do so that old trendlines often re-enter a stock’s trading patterns, sometimes reversing their old roles so that support lines become resistance, and vice versa. If agency approval of the Banpu deal takes long enough, the trendline may rise in the future to meet the stock’s price at that 6.20 level.

With the various drivers influencing Centennial’s fundamentals, traders should expect continued volatility until the dust clears. In the meantime, the yawning gap between 4.64 and 5.83 begs for at least partial filling and the relative strength index reads 73.33, above the overbought level. Traders should watch for CEY to sell off some as early buyers take profits and markets await the next act in Centennial’s drama.

technical analysis by Craig Liles

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