The steel sector, which has been one of my favorites over the past year, has undergone a change in character that now puts it on my "short watchlist." Four elements make it an attractive short:
1. Signs of distribution, with high volume down days accompanied by low volume updays.
2. Break of the 200 day moving average, which had previously acted as a loose trendline.
3. Change in character of the stochastic indicator. During the trend, oversold levels were bought up right away, with the indicator spending little time in the bottom half of the chart. Current levels have remained oversold since late July.
4. Breakdowns in sector leaders such as MT, STLD, X and RIO.
A bounce towards the 200 day moving average may provide an opportune time to short stocks within the sector.