3 Trades on Massive Dips in 3 Industrial Stocks

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The market is always right, until it’s not. And right now, it appears that type of buying opportunity is blossoming among industrial stocks.

3 BIG Dips in Industrial Stocks to Buy

Not long ago, commodity and industrial producers were an “it” group once again among investors. Collectively, the narrative surrounding steelmakers and the like was that it was all blue skies for the group.

Donald Trump’s presidential victory turned on a constant thump for certain and grand spending on infrastructure, pro-growth and “America First!” initiatives. It worked. The masses listed — and traded. From November through the following months, it was sunny conditions, with 40% to 100% gains, even among the biggest industrial stocks.

Over the past couple of months, however, the sector has given back a large chunk of their gains. Simple trend-following pullbacks grew less and less simple, then morphed into full-fledged corrective moves.

Sure, new information has come to the markets. Investors are fretting weakened Chinese demand and South Korea dumping steel, there are concerns of Trump’s “big, huge, really huge” infrastructure agenda being on the ropes, and plunging iron ore prices have steelmakers cowering. But should we assume that today’s headlines are any more accurate in their implications?

Today, I want to look at three industrial stocks that, after enjoying a bout of overdone buying, are now suffering a bout of overdone selling. Let’s see what kinds of opportunities in store, and how to wring the most profit out of them.

Industrial Stocks to Trade on the Dip: U.S. Steel (X)

Industrial Stocks to Buy on the Dip: U.S. Steel (X)
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Source: Charts by TradingView

Of the three stocks we’re looking at today, I’m convinced X is the least buy-worthy at this very moment.

U.S. Steel doubled in price during the first post-Trump push, but it has since corrected by roughly 25%. The size of the pullback implies that X shares should be in value territory, but U.S. Steel is a notoriously volatile stock. And with shares having broken support at the 50-day simple moving average, I think the current price consolidation will prove bearish — in the short-term.

Ideally, I would be much more interested in buying somewhere in the $21-$26 range. The loose and removed price zone reflects both the aforementioned volatility, as well as Fibonacci, the Trump gap and trendline supports.

The Trade: Consider the May $27/$24 bull put spread. This trade is priced at 50 cents with shares near $31.15. The expiration breakeven of $26.50 sits slightly above the discussed technical-based value zone.

The spread has a margin of safety of 15% versus today’s price in X shares. Also, with risk contained to $2.50 and an embedded earnings report in the May contract, there’s always the chance of averaging into X stock within the ideal value range via this spread.

Industrial Stocks to Trade on the Dip: Cliffs Natural Resources (CLF)

Industrial Stocks to Buy on the Dip: Cliffs Natural Resources (CLF)
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Source: Charts by TradingView

Cliffs is another company involved in steel production, but it has done a better job of reaching deep value levels. After climbing by a nearly identical 100% during its happier times, the past two months have seen CLF stock retreat by a full 40%.

Also, we find that shares have broken some significant (if not over-touted) technical supports. That’s OK in my book. Textbook holds are way overrated in their success rate.

It’s typically better to use a chart as a rough guide in making decisions. In this case, I think CLF can bottom without having to necessarily break below uptrend line support near $7.15.

The Trade: The  May $9 call/$7 put collar fits in well with my view. The collar is priced at $7.67 with shares priced at $7.37. However, risk is set at roughly 9% versus upside potential of 17%. Better still, you can always look to trend-trade and increase the return by adjusting the position if CLF turns higher.

If Cliffs doesn’t move higher initially, depending on your conviction, you could accumulate shares on price weakness with much greater risk assurance than a straight-up purchase of CLF stock.

Industrial Stocks to Trade on the Dip: Freeport McMoRan (FCX)

Industrial Stocks to Buy on the Dip: Freeport McMoRan (FCX)
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Source: Charts by TradingView

Maybe it’s because of those differences — as well as concerns about mounting losses at a key Indonesian mine, debt obligations and poor past execution that still plagues the company — that FCX saw less than half the returns of X and CLF throughout the Trump rally.

Moreover, FCX shares have completely retraced that rally!

Freeport is testing uptrend support and challenging the 200-day SMA, as well as the 38% retracement level dating back to 2016’s cycle low in January.

Is the deeper testing a good situation for contrarian investors looking to get long? I like to think so, but given the all-around weaker price action, I believe FCX has to show us the money — with upside price confirmation. Also, I’m not interested in buying shares on additional price weakness. With that in mind …

The Trade: The May $14 call, priced at 22 cents, looks good here. With FCX at $12.90, a rally of 10% is required for this purchase to break even at expiration. That’s just above recent highs in FCX, as well as the 50-day SMA If this were to occur, Freeport-McMoRan would be reasserting its uptrend. (That’s showing us the money.)

There’s always the chance that if a Freeport rally happens sooner than later, profits can accrue below $14.22 as the delta value, and an expected lift in implied volatility (tied to earnings in two weeks) should trump time decay.

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.

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 and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/3-big-dips-industrial-stocks-to-buy-x-clf-fcx/.

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