Schaeffer's Trading Floor Blog

Molycorp May Be at a Turning Point

Schaeffer's Senior Options Strategist breaks down MCP's technical and sentiment backdrops

by 8/29/2012 12:22 PM
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Rare earth producer Molycorp, Inc. (NYSE:MCP) is in a brutally severe downtrend since peaking near $870 in spring of 2011. Shares are down more than 53% year-to-date, and 80% year-over-year. On Monday, MCP made a 52-week low at $9.40.

This summer we have seen an acceleration of this downtrend. Prices have broken down from a long-term channel, as seen below on the weekly chart. This can sometimes indicate an exhaustion of the current trend. Combining this observation with the enormous spike in volume (green circle on the volume bar) two weeks ago may lead to a bottom.

Now, it would be an understatement to say the company has had a string of disappointing earnings and revenues, but sometimes "it's always darkest before the dawn." The following bullet points will try to convey the technical, as well as the sentiment, picture for shares of MCP.

  • A spike in volume may be an indication of a bottom, as older owners of MCP basically capitulate their shares to new shareholders.
  • Shares spent a few days last week under the round-number $10 level before gapping higher on Tuesday, leaving an island-type reversal.
  • Significant gap resistance between $13 and $16 from the company's Aug. 2 earnings report may be a short-term issue for shares.
  • Peak put open interest resides at the 10 strike. This may offer options-related support, as an unwinding of these bearish bets could provide a tailwind for shares.
  • Heavy put buying during the past 10-day and 50-day periods indicate a highly pessimistic view among option players toward MCP.
  • Since last year, short interest has grown over 125%, and now represents nearly 29% of the stock's float. Short-covering rallies could be expected at current levels.
  • Analysts who cover MCP have five "hold" ratings and one "strong sell" suggestion. Just this morning, Gabelli & Co. upgraded the shares to "buy" from "hold." We could see more upgrades in the future, which could help push shares higher.
Weekly Chart of Molycorp, Inc. (MCP) since July 2011
Chart courtesy of
Chart courtesy of eSignal

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