This morning, I’m recommending a bullish trade on United States Steel Corporation (NYSE:X).
The bullishness on the S&P 500 continued yesterday. The index has pushed to another new all-time high.
Last week’s trade optimism has continued to build as the U.S. considers extending tariff exclusions on $34 billion of Chinese goods. The exemptions are a good sign of things to come, and President Trump recently announced the trade negotiations for “Phase One” of the trade agreement are ahead of schedule.
X, along with other steel stocks, is pushing higher because of the general bullishness in the market and the potential effects of the trade agreement.
The Steel Industry Hasn’t Gotten Much From the Trade War
When steel tariffs were initially announced in 2018, there were early gains for the industry. Evidently, the increase in profits from that time was based on supply concerns. Steel customers bought more steel because they were concerned about a price increase.
But then U.S. steel mills flooded the market with product, and demand couldn’t keep up. X said as much in September when it announced a lackluster profit forecast. A slowing global economy, partially due to trade conflicts all over the globe, may have hurt its outlook.
With the trade war moving in a positive direction, investors theorize that demand — particularly from industrial companies — could pick up, which would help companies like X.
Pushing Higher as Earnings Approach
X has lost a little over 30% of its value since the beginning of 2019. On the chart below, you can see it has developed strong, down-trending resistance. But now, after the positive trade developments and a stronger-than-expected start to earnings season, the stock has pushed above that resistance.
Daily Chart of United States Steel Corporation (X) — Chart Source: TradingView
If the U.S. and China continue to make progress, we could see more bullishness from X. Demand for steel is expected to grow across the globe according to the World Steel Association, and if the market continues to push higher, it will only support that conclusion.
Even if the bullishness in the market only lasts a short time, I think X will continue pushing higher in the near term. We can collect with an inexpensive call debit spread on the stock.
Using a spread order, buy to open the X Jan. 17th (2020) $13 call and sell to open the X Jan. 17th (2020) $15 call for a net debit of about $0.55.
Note: Be sure you are opening the monthly X options that expire on Friday, Jan. 17th, 2020.
About Call Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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