The China Evergrande story has been unkind to risk assets, but do you know which industries were hit the hardest here in the U.S.? Those connected to global growth like Cleveland-Cliffs (NYSE:CLF). Today we’re going to take a fresh look at the damage dealt to CLF stock and identify which trades look best moving forward.
Cleveland-Cliffs is an Ohio-based producer of iron ore and steel products, with upstream and downstream operations. During the post-pandemic stock boom, the steel industry caught fire as investors came rushing in to profit from the post-pandemic boom in economic activity.
CLF is not the only steel stock to see its share price balloon over the past year. Nucor (NYSE:NUE), Steel Dynamics (NASDAQ:STLD) and United States Steel (NYSE:X) have all participated in the bull market.
In spotting the biggest losers to China’s drama, I focused first on the market performance during last Monday’s monster down gap. The S&P 500 fell 1.7%. Anything declining more than that essentially exhibited relative weakness. Anything falling less saw relative strength.
Cleveland-Cliffs shares were down a whopping 9.7%. Even if you adjust for its higher beta of 2.2 and say it would have to drop more than 3.7% to show true underperformance, it more than qualified.
With all of that said, let’s take a look at the price chart for CLF stock.
A Closer Look At the CLF Stock Charts
The weekly time frame shows just how epic CLF’s ascension has been. Since bottoming in March of last year at $2.63, prices rose to as high as $26.51 before the recent correction. That’s a rise of over 900%.
When you combine its cheap price tag and explosive upside, it’s no wonder CLF stock is so popular among active traders. But, as traders learned last Monday, the volatility slices both ways.
In surveying the damage, the weekly trend is deteriorating. This is the first time we’ve closed below the rising 20-weekly moving average since mid-2020. The next support pivot at $19 needs to hold, or else we’ll form a lower pivot low, hammering another nail in the bulls’ coffin.
The daily chart reveals a second reason why $19 is significant. It hosts the rising 200-day moving average. Remaining above it is key to maintaining order and any semblance of bullishness to the daily trend. The first test held last week, but the bounce that followed failed, and we’re on our way back down again.
Generally, the more we test a support zone, the weaker it becomes.
In mapping out the best way to trade here, I see two routes. First, wait for evidence that the daily trend is turning back up and go bullish. Second, bet that the recently established downtrend has legs, and will ultimately break the 200-day moving average.
It’s Time to Pick a Side
Bulls need CLF stock not only to hold the 200-day moving average, but also push above this week’s pivot high of $21.25. Doing so will reverse the series of lower pivot highs and lows that are now in place, signaling the trend is turning back up.
Until then, any bull trades are based on hope and not sound technical signals. When/if we do pierce resistance, I like selling naked puts as a way to play. The premiums are juicy and potential rewards large enough to consider the limited reward trade.
While the strike and month might need to be modified based on when the breakout finally arrives, I like selling the Nov $17 put strike if the trigger comes quick.
If you think the downtrend has legs, then buying put spreads is the way to go. You could enter now or wait for a break of the 200-day moving average to profit further confirmation. Buy the Nov $20/$15 put vertical for around $1.80.
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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