It’s been quite the turnaround for United States Steel Corporation (X) investors the past couple months. But from a bearish extreme, an over-the-top rally is looking technically heavy — and ready for bears to once more turn a profit in X stock.
In recent days, investors haven’t let a little thing like a larger-than-expected loss or weaker-than-forecast sales drop stand in the way of keeping a bid underneath X stock.
In the face of those weak-looking financials, investors have nonetheless pushed X stock up by about 4% despite a massive rally of about 235% since late January at recent highs.
Of course, as a cyclical company, U.S. Steel has seen difficult economic conditions and losses pile up before, so today’s situation isn’t entirely new for X stock holders.
As much, investors could be looking ahead to an eventual upturn in business and return to profitability. In fact, U.S. Steel is now expected to generate EBITDA of $400 million in 2016 compared to Street views of $211 million.
The steel producer also found investor support for a $500 million debt offering announced Monday, as shares climbed by 6%.
The new secured debt will be used to pay short-term debt obligations and help with the company’s dwindling cash position, a point of concern among investors.
At this point in time, setting niceties aside, we’re bearish on X stock.
Following U.S. Steel’s outsized rally — at least partly fueled by heavy short interest covering bets, Moody’s downgrade on U.S. Steel’s debt and a pattern-top worthy of increased attention from bearish investors seeking reprisal — X stock is an interesting candidate for shorting.
X Stock Daily Chart
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As mentioned, part of the aggressive run higher likely came at the expense of fairly large bearish positioning. The last reported figure from mid-April was north of 30% of the X stock float.
Now, and with a confirmed double-top pattern in place under 38% Fibonacci resistance, profits are likely to return to the remaining bears and new bears initiating U.S. Steel positions.
For an initial downside price target in X, I’d hazard a loose, but appropriate, zone from $12.50 to $15.50 based on Fibonacci and moving average supports.
Bearish U.S. Steel Options
Reviewing U.S. Steel’s options board and given our expectations, the X stock June $18/$16 bear put spread is attractive.
Currently priced for around 75 cents with X stock at $18.95, the out-of-the-money vertical cuts down the premium of the purchased $18 put by more than 50%.
The breakeven at expiration is about 9% lower and the max return of $1.25 would require a drop of nearly 16% in shares of U.S. Steel.
On the surface, it may appear the spread is asking a lot, but given the size of the move since the end of January (and other discussed factors which could weigh down shares), perspective is essential.
Additionally, the vertical is purposely priced above the described support zone of $12.50 to $15.50. If there is pressure on shares, ultimately the positioning will help with profitability.
Lastly, should shares of U.S. Steel weaken in the near future, profits can begin to accrue and provide nice adjustments for the limited risk, bearish trader.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
