The Perfect Way to Short Nuclear Power Stocks

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About 20% of the world's energy supply comes from 440 nuclear power plants, located in 25 countries around the world. About 12% of these nuclear reactors are in Japan.

As the headlines describe, the devastating earthquake and tsunami that struck Japan on March 11 triggered a series of explosions, leading to the partial meltdown of a nuclear plant, located 150 miles outside of Tokyo. The impact of the meltdown has spread far beyond Japan, affecting nuclear-power companies worldwide.

Observers suspected plans for many of the world's 60 new nuclear plants could be stopped, or at the very least halted, for some time to come.

This week, the Swiss government announced the suspension of approvals for new nuclear plants. The German government followed suit. Furthermore, Germany's seven nuclear facilities, built prior to 1980, will be shut down until at least May. This step leaves the country with only 10 operating nuclear facilities.

In France -- where 80% of the country's electricity comes from nuclear power -- the Green Party has called for a referendum on the future of nuclear power. And even China, which has had big ambitions for nuclear power-expansion, announced Wednesday, March 16, that it was suspending approvals for plants, pending safety checks at existing facilities.

In the United States, questions have been raised over how the Japanese reactor situation will affect President Obama's recent announcement to facilitate the building of two nuclear plants in Georgia. With uncertainty looming over the future of nuclear power, the nuclear industry could be severely hit. [I should note, however, that my colleague Nathan Slaughter has a different view. Go here to read his take .]

One way to trade the potential slowing activity in nuclear power activity is to take a short position in the PowerShares Global Nuclear EnergyETF ( PKN ) . This fund represents 65 global companies involved in the nuclear energy industry.

With a focus on large-cap firms, the exchange-traded fund ( ETF ) includes companies that build reactors as well as utility, construction, technology, equipment, service provider and fuel firms.

PKN has a high exposure to Japanese securities -- about 25% of holdings. Japanese electronic producer Toshiba (PINK:TOSBF ) is the second-largest holding,accounting for 5.4% of the fund, behind only French power company Areva (EPA:CEI) , which is the fund's largest holding, at 8%.

Technically, PKN appears fragile.
 

Not surprisingly, the fund took a nosedive this trading week, dropping nearly 20% from a recent two-year high near $22.58 to around $18.

While plummeting, PKN catapulted through the Major uptrend line, which had formed over the past two years. Forming a large bearish gap on much highervolume than normal, the fund fell through several important support levels, including the 10-,20-,30- and 40-week moving averages and the lower Bollinger band (displayed as colored lines on the chart).

With continued uncertainty in the nuclear industry, PKN could easily fall several more dollars, not finding technical support until around $15.20.

The indicators -- RSI , MACD , Stochastics and Williams %R -- are all bearish. The RSI uptrend line, which had been forming since April 2009, is now broken. RSI is also now below the key 50 juncture and falling.

MACD has given a sell signal, indicated by the black line crossing below the red line. The MACD histogram is now below zero and building in negative territory.

Stochastics and Williams %R, both overbought/oversold indicators, show the fund is no longer overbought. Both indicators have given sell signals.

Action to Take --> Given PKN's technically bearish picture combined with a shaky outlook for the nuclear industry, I am bearish on the fund. Despite the price decline that already has taken place, the nuclear industry will likely face more adverse publicity in the near future.

If the fund's price dropped from current levels to support at $15.20, traders who established a short position could reap a return of about 16%. I also recommend a stop-loss at $20.11.


-- Dr. Melvin Pasternak

P.S. -- I don't know if you're aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America's electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…

Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Commodities , ETFs , Investing Ideas

Referenced Stocks: ETF , PKN , TOSBF

Melvin Pasternak

Melvin Pasternak

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