Today Cliffs Natural Resources Inc (NYSE:CLF) is falling off a … well, a cliff. The 6% drubbing (so far, at least) continues a dramatic descent that began in mid-February when CLF stock topped at $12.37. It has been a rough ride ever since, with support levels giving way left and right.
For the uninitiated, Cliffs Natural Resources is a Cleveland, Ohio-based business that specializes in iron ore. It resides in the basic material sector and received a huge shot in the arm following November’s election alongside the rest of the space.
Sadly, while the entire sector has held firm to its post-election gains, CLF is close to giving it all back. The whole episode has been a volatility filled, round trip ride.
Today’s plunge is creating a breach of major support. The $7.65 zone boasts (well, it boasted) a horizontal support level and the 200-day moving average. Both have been shattered by today’s sucker punch.
This is the first time CLF stock has dropped below the 200-day moving average since it bottomed in early-2016. Little support exists until $6.50, so don’t be surprised if the stock continues plumbing the depths here.
Bet With CLF Stock Bears
In sizing up potential trades, two things become apparent. First, Cliffs Natural Resources is becoming oversold. Since gapping up to $9 a week ago, CLF has dropped $1.50. That’s a rapid-fire 17% haircut. Second, the support break has brought in fresh selling pressure despite the stock’s oversold status.
The million dollar question is which force wins out. Does CLF stock finally bounce to work off its oversold status? Or does Cliff continue tumbling due to today’s support breach? You can see how this setup is far from a lay-up.
Whether you sally forth with bearish trades now or wait for a rebound before pulling the trigger comes down to personal preference. In situations such as this, I suggest scaling in.
Suppose we want to buy the June $8 puts to profit from further downside in CLF. Instead of buying the whole position here for $1.20, buy half.
If CLF stock does rally back a few days, you can buy the other half at a lower price, like 80 cents. That will lower the average cost and put you in a better spot to profit from its next descent.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.