United States Steel Corporation (NYSE:X) was certainly a poster child for the “Trump Trade.” X stock basically doubled from the Nov. 8 pre-election close of $20.96 to the Feb. 21 post-election high of $41.57.
Since that time, however, U.S. Steel has given back nearly 65% of those gains.
Just as the rally in U.S. Steel was way overdone to the upside, I think the selloff is way overdone to the downside.
From a technical perspective, X stock is definitely getting oversold. The 9-day Relative Strength Index (RSI) is now below 25 which was a reliable indicator of significant intermediate-term lows in the past. U.S. Steel is down nearly 6 points, or 23%, in just the past three trading days.
Some of the weakness can be attributed to news of a process leak that has since been remedied. Lower steel prices, as discussed in a previous article by Robert Martin, were an even bigger culprit. Steel prices fell again yesterday, dropping to the lowest level since early November and down 30% for over the past month.
Both steel prices and steel stocks are getting extremely oversold and due for a bounce.
The $27 area now looms as critical support for U.S. Steel, which marked both the pre-Trump high and also the breakout igniter that propelled X to the recent highs. I expect this level to hold over the coming weeks. The 200-day moving average of $27.75 should also lend some significant support.
While much of the initial euphoria over Trump administration infrastructure plans have been sidetracked by the failures of Obamacare repeal and tax reform, the infrastructure plans still should be green-lit, albeit in a somewhat watered-down form. The recent news out of China, the world’s largest steel consumer, that first-quarter growth was better than expected should also provide an underpinning to steel prices.
U.S. Steel earnings are due April 25 after the close. Expectations are for 36 cents per share in EPS and $2.9 billion in revenues. With X now at much lower levels, downside earnings moves have been somewhat tempered simply due to a much cheaper stock.
Implied volatility (IV) is heightened in front of the earnings report, making option selling strategies more viable. If you want to position for U.S. Steel to … ahem, steel itself at current levels, consider the following trade.
How to Trade X Stock
Buy the X May $24 put and sell the X May $26 put for a 45-cent net credit.
Maximum gain on the trade is $45 per spread with maximum risk of $155 per spread. Return on risk is 29%. The short $26 strike provides a 10% downside cushion and also is positioned well below the $27 major support level.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
