Steel stocks are being affected by two narratives. One has been in place for more than a week, and the other is only a few hours old. First, the Senate passed a bipartisan $1 trillion infrastructure bill that sent buyers running to steel companies eight days ago. A tidal wave of money aimed at various infrastructure projects can only mean increased demand for raw materials.
That’s the tailwind. Now for the headwind.
Stocks sold off hard after the latest Federal Reserve meeting minutes hit the wires during late-day trading Aug. 18. Apparently, investors didn’t like the idea of the Fed advancing their tapering timeline. The minutes showed some members were willing to reduce the current pace of asset purchases before year-end.
Steel companies fell prey to the selling pressure, though the majority of them still closed green. If angst over the shifting Fed policy continues to weigh on equities, bullish steel plays face an uphill battle.
But if you think it’s a battle worth fighting, some steel stocks offer excellent setups. Given their recent outperformance, you’ll be hard-pressed to find better stocks to shop than these three:
Steel Stocks: Steel Dynamics (STLD)
Steel Dynamics was founded in 1993 and is one of the largest steel producers and metals recyclers in the U.S. The company has several facilities for iron and steel production, six steel mills and more than 90 locations dedicated to recycling metals.
Its stock recently cleared a three-month base when it blasted through resistance at $66. The breakout saw a huge volume spike to show widespread participation.
Those that missed the burst will be happy to know STLD stock has retreated for three sessions and now offers a textbook bull retracement.
Now that it has tested the $67 area from the topside, there’s a good chance the old resistance level will become the new support level. The 20-day moving average is also rising close and is likely to lend a hand to buyers.
For confirmation that the next advance has begun, consider waiting for a break above a prior day’s high.
The Trade: Buy the November $70/$80 bull call spread for around $3. You’re risking $3 to capture $7 if STLD stock pushes past $80 by expiration.
Nucor describes itself as “North America’s most diversified steel and steel products company.” It has more than 300 locations throughout the U.S. and across the globe. The company offers a variety of raw materials and finished steel products through several brands.
NUE stock has been red-hot this year and has definitely seen the largest 2021 gains of today’s trio at 116%. While its momentum has been better, its recent pattern is mirroring that of Steel Dynamics.
The past three-month base ended last week with a rousing breakout over $110. NUE stock’s volume spike echoed STLD stock and once again confirmed big buyers were wading in.
Given the strength of the surge, I’m inclined to bet the current dip will be similarly gobbled up by investors. The implied volatility isn’t high enough to support selling bull put spreads — I tried and couldn’t get far enough out-of-the-money. Thus, I’m repeating my bull call spread idea.
The Trade: Buy the October $120/$135 bull call spread for about $5. You’re risking $5 to potentially pocket $10 if NUE stock rises beyond $135 by expiration.
Steel Stocks: United States Steel (X)
We’re ending with a company that arguably boasts the best name of the three. As you likely know, U.S. Steel was founded in 1901 by several famous names in business, including Andrew Carnegie, J.P. Morgan and Charles Schwab. Its products have been used in buildings, bridges, sculptures, planes and boats for more than a century.
X stock is one of the most recognizable steel stocks on the market. That said, its price performance and current pattern certainly merit a mention as well. While its predecessors just dipped over the past few days, X stock has been treading water to form a high base pattern.
Additionally, accumulation days have consistently cropped up with nary a whiff of distribution for the past month. I was particularly impressed by the pop on Aug. 18. At its intraday peak, X shares were up 8% on the session. They might have stayed there had the Fed drama not killed the mood.
If you believe Wednesday’s late-day weakness and any downside follow-through are only delaying the inevitable uptrend continuation, consider building bullish trades here.
The Trade: Buy the November $30/$40 bull call spread for around $2.35. You’re risking $2.35 for a reward of $7.65 if X stock can rise to $40 by expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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