JOY Can Jump this Summer

 | Mar 26, 2014 | 9:18 AM EDT  | Comments
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Joy Global (JOY) was one of the session's top gainers on Tuesday and is now testing a breakout to new 52-week highs while the broader market is struggling to make new headway. But can this equipment make really take a lead in the current market climate? There is reason to be wary.

Joy Global's biggest competitor is Caterpillar (CAT). But while Caterpillar has been on a run in recent months, Joy Global has been consolidating.

In many respects, Joy Global's action over the past two quarters makes it an interesting prospect for short- to intermediate-term traders looking to take advantage of a breakout to the upside. After striking monthly price support back in mid-2012 at the 61.8% Fibonacci retracement level, Joy Global continued to hold that support for a second test in mid-2013. Its shares climbed steadily throughout the next four months, gaining some momentum into the 20-month simple moving average.

It has been hugging that 20 sma resistance ever since. This is typical behavior before this particular moving average will break and the fact that the congestion is right at the midway point of the selloff from the first two quarters of 2013 leaves it with ample room to run before striking its next major weekly resistance around the $64-65 zone.

Trends within a trading range also tend to develop in wave sets of two. This means that you will often see two swings to the upside within the congestion, followed by two swings lower. Joy Global has only had one primary upswing on the monthly time frame, so has room for a second wave higher.

The daily charts also suggest that further upside in the near term may be in store for Joy Global. The price pattern on the daily charts is that of an inverse-head-and-shoulders pattern. When this pattern first began to develop back in late October the volume began to decline. This is exactly what the bulls want to see occur. But over the past two months, the volume has not been as bullish. While Joy Global has congested within what would be considered to be the right shoulder, volume has increased. This indicates greater uncertainty and does increase the risk for a false breakout.

The false breakout risk is also present on the weekly and monthly charts. Since mid-2012 Joy Global has been trading in a range after a rather substantial selloff that took place between 2011-2012. When continuation patterns form, they also often have two waves. In this case, they would be counter-trend waves on the upside as shown on the weekly and monthly charts.

Joy Global has two lows, but so far only one high. It is working on what might be the move into that second high before weakness once again takes hold. The pace of the buying off the second low is much slower than off the first and volume is also lighter as a whole. Both are bearish signs.

But the time development for a bearish trigger is still early. This means that the next few weeks could still play out to the upside, but the move will face a great deal of bearish pressure from the larger timeframes.

The data behind the charts is also disconcerting for longer-term investors at present. Unlike its peers, Joy Global's dependence upon coal mining is very high and commodity prices have been under pressure. The company has been making an effort towards greater diversification, but its dependency on coal the mining industry was still at about 62% in 2013. Demand for new equipment in this arena has been dropping steadily, with only a couple of exceptions in South America and China.

But there has been an increase in component and rebuild activity in the industry. This, coupled with expansion in China and warmer weather on the horizon, can help pull Joy Global's stock higher over the summer on the current breakout move, but at this point I'm not at all convinced that it will be a strong breakout, nor a sustainable one.

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