China's third largest by coal production and the only U.S. listed coal miner, Yanzhou Coal (YZC), lost ground today. The stock slid $7.26 from yesterday's close with no end on sight. One might ask: is it oversold? And if so, how to make money?

By looking at the following screenshot from Yahoo Finance, RSI for YZC stands way below 30, a technical definition for oversold. The price development of the stock looks even more dramatic. What's going on?

First of all, overall market sentiment in the U.S. isn't any help. As the following screen testifies, stocks are on retreat all over the board. Only three Chinese ADRs have managed to stay in the black by noon. All of yesterday's big winners; Sinopec (SNP), Petrochina (PTR) and Huaneng Power (HNP) are all in the red big time.

 

TOP MOVERS		6/20/2008 12:30
Symbol	Price	Change	Change%
JOBS	19.28	0.10	0.52%
LTON	1.90	0.09	4.97%
STV	15.15	0.07	0.46%
COGO	10.08	0.00	0.00%
GRRF	5.08	0.00	0.00%
ICAB	25.55	0.00	0.00%
UTSI	5.87	-0.01	-0.17%
ATS	1.39	-0.01	-0.71%
GRIN	0.46	-0.02	-3.99%
CHINA	2.72	-0.04	-1.45%
CN	54.61	-1.91	-3.38%
SHI	39.55	-2.46	-5.86%
ACH	32.06	-2.49	-7.21%
SINA	45.80	-3.29	-6.70%
HNP	32.06	-3.78	-10.55%
PTR	133.89	-6.60	-4.70%
YZC	86.35	-7.26	-7.76%
SOHU	74.83	-8.47	-10.17%
BIDU	326.22	-8.59	-2.57%
SNP	103.35	-9.07	-8.07%

But Yanzhou is somewhat different. It is not a temporary technical correction what we've seen in the last few days but signals a fundamental change. 

The change for Yanzhou is that Beijing introduced a temporary freeze of coal price at prices back in Dec 31, 2007. Given that coal prices have increased by 60 percent since January, the price cap set at the price of coal back at last year's end means a significant drop of revenue for coal miners.

The story is somewhat similar to what has happened to oil refiners in China. Petrochina (PTR), an integrated oil conglomerate is suffering not only from capped fuel prices at the pump but also a windfall tax. This tax is designed so that it kicks in above $60 a barrel and reaches 40%. So profits for Petrochina, China's largest oil producer, is capped by excessive taxing.

Going back ot Yanzhou Coal: a temporary freeze on coal prices means previous earnings calculations are off the window. So it's time to readjust YZC to new regulations.

Going back to the original question, if YZC is oversold - the answer is YES! With that in mind a technical correction could swing back YZC $5-$6 next trading day. However given current negative market sentiment, a sentiment that is most likely to spill over to Asia on Monday, investors may have to wait until Tuesday to short all YZC holdings. If I had excess cash, I'd buy YZC later today and short it on Monday or Tuesday. Hope you make money!

Looking for longer term, YZC has not reached the bottom yet, accoring to our oversold/overbought indicator.

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