The Next Explosive Bottoming Formation: Steel

Back in December we successfully identified and swing traded the bottoming formation in gold miners, followed by energy/oil/gas in early January.  Often when one or two sectors show this formation, other related sectors will follow.

Steel is showing signs that it is the next bottoming formation candidate.  This sector does not have an ETF to trade, so we look to leading stocks like X.

Notice the trend line break.  The big gap up 5 days ago was an earnings breakout, which gives the stock the catalyst it needs to start a new trend.  Positive volume is pouring in, which is exactly what we want to see.

As we saw with gold miners and energy, these types of bottom formations take time to develop and are volatile.  You must be patient with entry as there will likely be a pullback and test of the lows.

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Today's Trades: NOV (and Steel comment)

I bought 300 shares of NOV at $114.35. Buying this stock on pullbacks has become a go to move for me, like Allen Iverson's crossover. This is one of those "keep doing it until it ceases to work" trades, akin to feeding a hot three point shooter. Okay, that's it with the NBA references . . .



Steel is looking ugly as ever, but as I said in last night's post, I'm hesitant to short until we get a bounce to the 200 day moving average.

Four Reasons to Sell Steel

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.

Today's Trades: SYNL and ZEUS

Both of today's trades came from last night's journal. As I noted last night, I like the action in steel stocks. I bought:

400 shares SYNL at $39.12

400 shares of ZEUS at $32.90.

Both stocks made confirmation moves following low volume pullbacks.

I am heavily weighted in steel stocks, with these two and STLD, so I may take some profits later today.

ZUMZ Bullish Englulfing Pattern, Steel, Energy and the UFC

I entered ZUMZ yesterday on a pullback to support, and today it looks as though we have confirmation that the stock is going to bounce. ZUMZ printed a bullish engulfing pattern where three areas of support converged (the 50 day moving average, price and gap support). I could not have hoped for anything better.

Conservative traders would argue that yesterday's entry was risky. The safe way to have played ZUMZ would have been to place the stock on your watchlist as it moved to support, and entered only after they type of bullish confirmation signal we received today.


Steel and Energy stocks are high priorities on my watchlist. The two sectors are finally pulling back, albeit after parabolic moves up. STLD, RIO, PDE, VLO, HOC, MT, XTO and DNR are a few of my favorites right now. I've also added two new stocks to the breakout-pullback watchlist.

Off-Topic:
As many of you already know, I am a huge UFC and boxing fan. Saturday night, UFC is showing a good match-up free on SpikeTV. Mirko Cro-Cop against Gabriel Gonzaga. Mirko is known to unleash some of the most lethal kicks in mixed martial arts. Check out the teaser:

Today's Trade: SSRI

I've been eying metal related stocks for a short, and SSRI (Silver Standard Resources, Inc.) seems to be rolling over for a retest of last week's lows. More than a few elements make this an attractive short.

1. The low volume pullback seems to be stalling right at resistance.

2. The two day RSI made a lower high and seems headed down to oversold levels.

3. Stochastics seems to be losing momentum and ready to turn.

I went short 500 shares of SSRI at $32.24. I will likely place a stop in the $33-34 range with an initial target of $29.50.

I've also had my eye on some steel stocks, but all the acquisition talk in that sector has me a little gun shy.

Chart: STLD

Steel has been one of my favorite sectors over the past few months, with STLD being the trade of choice. Notice that the 50 day MA and the gap level converge at the same point. It will be interesting to see if the stock can hold above this level ($35.75-36). If the bulls can't hold the line, I can see the stock dropping down to $33.

Today's Trades: RATE and AKS

I bought 500 shares of RATE at $42.53. The stock spiked up over resistance on strong volume and has now pulled back on diminished volume, printing an ideal NR7 entry.




I bought 500 shares of AKS at $22.08. As you guys know, I love steel right now. I picked AKS from last night's watchlist after the strong volume break above $22, which has been a minor resistance point over the past few weeks.

A Quick Note Before the Open

I will be looking for weakness in steel stocks to re-enter STLD or possibly a different steel stock.

Today's Trades: EWZ and RIO

As discussed last night, EWZ looks attractive as a pullback candidate, so I bought 500 shares at $46.10.

I bought 400 shares of RIO at $32.25. I've been waiting for a decent entry in a steel/metal stock for quite some time now, and finally found a decent pullback. I placed my stop at $30.90, just under the last breakout. Note the smaller position size. The fact that the stock has been on such a tear required me to take a reduced position.