Tuesday, May 5, 2009
(Cont'd from above)...

Jim (cont'd):   

Not tonight. Tonight, we're doing things differently. This time, instead of trying to figure out what the big boys are thinking... instead of arguing about the technicals versus the fundamentals... we're going to approach the charts the way we used to do, at my old $500 million hedge fund...

So, let's take a look at Cleveland-Cliffs Inc. (CLF)... a company that produces the best, highest-grade iron ore and metallurgical coal...

Alan Farley, my colleague at TheStreet.com... brought this one to our attention...

You don't have to know a thing about technical analysis to know that CLF has been breaking out... I mean, look at this breakout... that's a first-class breakout... It almost makes it seem like you've missed the move...

I say you almost missed it... because Farley points out that CLF just broke out of a month-long rectangle consolidation pattern, compared to some of the other things chartists look for... a head and shoulders, a cup and handle, a candle chart... reverse head and shoulders... This rectangle looks pretty tame, right?... But it is a bullish sign when things break out of the rectangle... Some would say it's just basic geometry gussied up in the chart form that tells us nothing... and the bullish move is over and done with...

No. Farley doesn't think so, and neither do I... and let me show you why...

Now you take a look at the weekly chart... okay?... When you switch to the weekly chart... well, look at this... CLF has barely done anything at all... you haven't missed anything... And, if you look at what's called the on-balance volume, or OBV, down here below... the bottom part... it's a measure of buying or selling pressure... That's a lead indicator of where a stock is going... The buying pressure is here (pointing to the chart)... It's quietly building, okay... and that's because large buyers are gradually accumulating the stock... So, we're not done... We're just getting started... which is why the weekly is so important...

What do I think...

I have to tell you... I took a look at the daily charts of CLF, and decided that I better find some reasons to like it... because, when I backed away, I figured, there must be something here, right... and then, when I looked at the weekly, I said, well, wait a second... I haven't missed anything!...

So I've got to figure out the fundamental case for why this stock is breaking out... In other words, I had to foment reasons, because the chart looked that great... Well, that's just like what I used to do at the hedge fund... where Karen Cramer would tell me to look at the charts, and find a reason to buy the sucker...

And, this time, I came up with not just one, but three reasons why I thought the chart looked right...

First off, CLF has just been hammered mercilessly by hedge funds liquidating their positions... Just in the filing period between June 30th and September 30th of 2008, 19 funds sold 100% of their positions... then D.E. Shaw, the fourth-largest shareholder sold its entire stake and, worst of all, the company got into a spat with a hedge fund called Harbinger, which just so happened to be the largest shareholder... CLF wanted to acquire Alpha Natural Resources, a coal company, and Harbinger went overboard trying to block the deal, which fell apart anyway... In an effort to call off the merger, Harbinger tried and failed to get the board to agree to a proposal that would have let the hedge fund own 20% of CLF, on October 3rd. And, ever since then, it's been making significant sales...

In the same period of time, CLF is down 66%. So, you can see... these are all those sales that we had from Hedge Funds Gone Wild... that's a true trampling... then the liquidations finally came to an end, giving the stock some room to recover...

The second reason to like CLF...

Up here, it was a $120 stock... It hit the 52-week high on June 30th... $120... with a market capitalization of $13 billion... Now, it is a lowly $27 stock and a $3 billion company... But its assets are the same... both hot-rolled steel and Central Appalachian coal have stabilized in price, after taking huge nosedives... we don't really have a lot of iron in this country anymore... and I think a real recovery could be on the horizon with the stimulus...

The company's 2010 earnings expectations already been cut in half though... That's much less than what's happened to the stock... So, the estimates get cut in half, but the stock is down 77%!... And I still expect the company to make a respectable $2.58 a share...

The third positive... the thing that closed the deal...

It actually came from another chartist... Rick Bensignor... He's Chief Market Strategist at Execution Limited... and he writes the "Top Gun Trader" at TheStreet.com... and he's a recurring "Off The Charts" character... He likes this group. CLF produces perhaps the best iron ore for steel making, but it has a great coal business. I like the coal side, but I wanted to be sure... and Bensignor gave me confirmation, when he predicted a move from $17, to the low $20s, in Arch Coal Inc. (ACI)... based on the chart, even as the group has had a bit of a move...

So, in other words, one chartist says the coal side is good, and Alan Farley... says its good... and I'm giving you the reasons to say it's good...

So here's the bottom line...

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