Today’s trade is offering another great risk-reward setup…
Arch Resources (ARCH) is a $3.3 billion “coking coal” company, meaning its coal is used to make steel.
We’re putting on this trade for a few reasons. For one, coal stocks as a group are starting to perform again.
Yesterday, Warrior Met Coal (HCC) broke out to its highest daily close ever. We’ve also seen powerful moves in CONSOL Energy (CEIX) and Alpha Metallurgical Resources (AMR) lately.
Additionally, I love what I’m seeing from Arch’s long-term chart. Below, you can see ARCH rallied 742% in two years off the COVID-crash lows.
It’s since spent nearly two years trading sideways. And as my regular readers know, this is perfectly normal behavior after such an explosive move higher.
It’s a stock’s way of storing up energy before beginning its next leg higher. And with coal stocks on the move, I’m betting that breakout happens soon.
Source: StockCharts (click to enlarge)
I suggest just putting on a starter position today.
We’re doing this to both manage our risk and emotions. You see, coal stocks can be extremely volatile. It’s common for them to rise or fall 5% in a day without any news.
A starter position will help us keep our emotions in check should volatility spike.
That said, I believe ARCH could hit $250 within the next 12 months.
Exit your position if ARCH closes below $155. That gives us a risk-reward ratio of more than 7:1 on this trade.
Action to take: Buy ARCH at current market prices.
Risk management: Exit your position if ARCH closes below $155.
Justin Spittler
Chief Trader, RiskHedge
