Cleveland-Cliffs (NYSE:CLF) is trying to rise from the ashes today, climbing 3.5% amid a risk-on rally. Stocks are jumping today after news that the government finally struck a deal to increase the debt ceiling. The resolution removes one of the scariest hobgoblins spooking investors. Interestingly, basic materials is the best-performing sector so far this morning, providing a tailwind to the CLF stock bounce.
While the broad market has Washington to thank for its sudden about-face, the relative strength of material stocks like CLF comes from somewhere a great deal farther away: China. The iShares China Large-Cap ETF (NSYE:FXI) is surging 4% today on heavy volume. For years, the fate of steel, copper, and other material companies has been tied to the global growth trade. And China plays a big part in the analysis.
Thus, it’s not a coincidence that steel stocks have suffered alongside Chinese equities. The VanEck Steel ETF (NYSE:SLX) peaked in early May and has struggled ever since.
Though CLF held its own during the first phase of the downturn, the past two months haven’t been so kind. This time frame also hosts some of the largest drops we’ve seen in FXI this year.
In sum, if today’s strength in FXI can continue, it will bode well for Cleveland-Cliffs. Of course, we’ll need to break through a few key resistance zones like the declining 50-day moving average, but this is as good a start as any.
With that backdrop now in place, let’s take a closer look at CLF’s chart to see if today’s strength is worth chasing.
CLF Stock Charts
It’s easy to forget, but Cleveland-Cliffs was trading in the $2 range last March. Its 10-fold explosion over the past 18 months has been incredible. And, honestly, some backing and filling should be expected after such a meteoric run. The current pullback has done more damage than its predecessors and is arguably the most concerning dip so far.
Here’s why. This is the first retracement that closed below the rising 20-weekly moving average. While it doesn’t spell imminent doom, it does demand tempering enthusiasm for the overall uptrend.
I’m keeping a close eye on $19. It’s the next support zone and needs to hold to avoid a full-fledged trend reversal. The daily chart reveals another reason why it’s significant: it hosts the 200-day moving average.
Ever since peaking in August, every rally has been quickly rejected. Once prices fell below the 20-day moving average, it became stiff resistance. Today’s rise is once again encountering sellers at the 20-day. How we resolve this test should point the way for CLF stock’s next move.
A Cautious Way to Play
Another variable to consider is the Oct. 22 earnings announcement. While the recent responses to these quarterly events have been somewhat muted, that hasn’t always been the case. Plus, with the stock gaining so much over the past year, there’s more room for disappointment. Couple that with the currently messy chart and I think traders are better off placing trades elsewhere.
Once earnings pass and we get a bona fide trend reversal in CLF stock (and, ideally, FXI), bullish trades will be easier to build.
That said, if you must try to bottom fish here, at least use short puts to increase your odds of success. Here’s the month and strike that make the most sense.
The Trade: Sell the November $17 put for 46 cents.
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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