When Goldman Sachs up- or downgrades a stock, investors have a propensity to listen. So when the firm on Monday upgraded its view on steelmakers including U.S. Steel (X), Steel Dynamics (STLD) and AK Steel (AKS), investors bid up the AK Steel stock a solid 8.7% on the day.
Goldman Sachs analyst Sal Tharani changed his rating on AKS from “sell” to “buy in a fairly dramatic change in his assessment of the company’s prospects. He also moved his price target on AK Steel stock from $3 to $6, or a 30% premium from last Friday’s closing price.
At the core of his change of heart on AK Steel stock, Tharani sees “significant multiple expansion in coming months as investors shift focus to longer-term earnings potential.” Important to understand, however, is that this isn’t so much a short-term trading call on the part of Goldman Sachs, but rather a longer-term shift in views on the steel sector and particularly on AKS itself.
If we look at the chart of AKS, the longer-term picture continues to be bleak. After falling out of a big bear flag pattern in July 2011, AK Steel stock continued its descent until April 2013, when it slowly began to move higher.
When looking at longer-term charts and potential turning points, I like to see divergence between price and momentum, which in the case of AKS began to take place in October 2011. The relative strength index bottomed in October 2011, while price continued to decline into the spring of 2011. Ultimately the relative strength was too much for the stock to remain weak, and price began to rise. So, while the stock still has more basing to do to look great, a first important part of bottom building has been done.
Also note that AK Steel stock broke past the 2010 downtrend and, barring a V-bottom bounce, the most likely course of action here is a sideways-to-somewhat-higher move in coming months.
On the daily chart, Monday’s upgrade of AKS led the stock to break out past two areas of resistance. First, the multiweek resistance area between $4.50-$4.60 was overtaken, as was a resistance point near the $4.90 area, which dates back to January. From here, AK Steel stock looks to have enough momentum to rise higher toward the $5.50 area in coming weeks.
Over time, the stock’s 50-, 100- and 200-day moving averages, which are fairly cluttered at the current juncture, also will catch up with AKS and give traders levels of support to focus around.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.