As Shares of USA Rare Earth Pull Back, Should Investors Dig In?

Shares of rare earth stocks and related companies retreated on Wednesday. Our recent picks, MP Materials (MP)  and Energy Fuels (UUUU) , fell by over 10% before a late-day rally pulled those stocks off their lows. 

Colorado-based Energy Fuels (read our most recent analysis here), a uranium and rare earths play, closed with a 4.73% loss on the day. Nevada-based MP Materials (our latest analysis is available here), owner of the Mountain Pass Rare Earth Mine, closed lower by 9%. 

Are Hot Sectors Cooling Off?

The hottest sectors right now, particularly rare earths, strategic metals, uranium, lithium and nuclear, were due for a pullback. Wednesday's pullback provided an opportunity to do a little shopping. After screening a series of relevant stocks, and winnowing through the results, USA Rare Earth (USAR)  was one of the few names left standing. 

Shares of USA Rare Earth declined by 10% on Wednesday, after reaching their all-time high on Monday. Along with Texas Mineral Resources (TMRC), USA Rare Earth operates the Round Top mine in Western Texas, home to one of the largest deposits of rare earth elements in the U.S. The stated goal of this company is to establish a U.S. rare earth magnet supply chain. 

Charting USA Rare Earth

USA Rare Earth’s chart has a so-called "parabolic" look to it, with an accelerating upward curve that could possibly lead to a blowoff top. Now that the stock is off its highs, the danger of being caught up in such a move has decreased.

Despite Wednesday’s decline, this stock has gained 145% in the past month, and 172% year to date.

USA Rare Earth is well above its 50-day (blue) and 200-day (red) moving averages. According to this stock’s relative strength index (RSI), USAR has been overbought for the past two weeks (arrow), but that condition has eased dramatically. USA Rare Earth’s volume has declined during this pullback, a bullish sign (shaded yellow).

Wednesday’s selloff pulled USA Rare Earth down to the 38.2% Fibonacci retracement of the September 25 to October 13 rally (upper red horizontal line). We used that Fibonacci as an entry point, at approximately $33.50. 

We plan to add to the position if this stock falls to the 61.8% Fibonacci retracement (lower red horizontal line). That retracement is located near $26.50.

The Bottom Line

USA Rare Earth and other stocks in the its sector are highly speculative. Investors in this sector are seeking outsized gains, but the risks are also high. As always, traders should make risk management their top priority. 

At the time of publication, Ponsi was long USAR, MP and UUUU.