- The uptrend in commodity stocks is officially dead, and bear trades have a green light.
- Alcoa (AA): Its share price plunged after earnings and now boasts a bear flag pattern.
- Newmont Mining (NEM): Gold stocks opened deep in the red Monday.
- United States Steel (X): X stock formed a nasty bearish engulfing candle amid heavy distribution Friday.
Commodity stocks have been riding high over the past two months as investors sought ways to capitalize on inflation. They acted as a safe haven against the carnage in the Nasdaq and elsewhere. Unfortunately, the past two weeks flipped the script, and commodity stocks are now getting creamed. It’s a sign of just how indiscriminate the selling has become.
Uptrends have been broken, and the path of least resistance has shifted lower. Last week saw downside pressure ease, but most basic material stocks formed weak bear flag patterns. And that makes them vulnerable to more downside. With old support zones looming ominously as potential resistance, we’re in an environment where selling rips seems smarter than buying dips.
Here are three stocks that could be good candidates for short plays.
|X||United States Steel||$29.46|
It’s easy to forget how much Alcoa (NYSE:AA) shares have ballooned over the past year. Last July, AA stock sat at $31. At its peak six weeks ago, it nearly touched $100. The triple illustrates just how beloved commodity stocks have become. And it’s not like the bull trend was built on fluff. There has been real earnings growth undergirding the ascent. Over the past four quarters, its earnings per share (EPS) have been $1.49, $2.05, $2.50 and $3.06.
That said, investors did find the latest release wanting. AA stock crashed 17% on the day following earnings, and it’s struggled ever since. Last week’s bounce saw declining volume and weak upside movement. It developed a bear flag pattern that ended Friday with a bearish engulfing bar. The next downside target is the 200-day moving average near $58.50.
To capitalize, buy put spreads.
The Trade: Buy the June $65/$60 bear put spread for $2.10
You’re risking $2.10 to make $2.90 if prices fall to $60 by expiration.
Newmont Mining (NEM)
Gold prices have experienced a significant unwind since topping $2,070 in early March. Given Monday’s decline, the yellow metal is now 10% off its high. Gold stocks have followed suit, and Newmont Mining (NYSE:NEM) is now in a daily downtrend beneath the 200-day and 50-day moving averages.
Bulls will argue this is a deeper pullback on the longer-term uptrend and thus a buying opportunity. Bears will point to the multiple support levels that have been broken and suggest they’re now resistance zones. Both views have merit, but I’m inclined to side with sellers until we see price reclaim the 50-day moving average.
The next down-leg could pull prices to $65.
The Trade: Buy the June $70/$65 put spread for $1.60.
You’re risking $1.60 to make $3.40 if prices slip below $65.
United States Steel (X)
United States Steel (NYSE:X) rounds out today’s hat trick of commodity stocks with one of the ugliest charts of the bunch. A triple top spelled the end of its uptrend last month, and it’s been doing nothing but sinking ever since. Last week’s earnings report was underwhelming and resulted in a nasty bearish engulfing bar. So far in early trading on Monday, prices are sinking further, completely ignoring the intraday rebound seen in the rest of the market.
The 200-day moving average beckons as the next target, and I think the stock can get there in a hurry. If prices get back above the 50-day moving average, I’ll change my tune. Otherwise, lower we go.
Usually, X stock is cheap enough for long puts. But the high implied volatility suggests spreads are a better route.
The Trade: Buy the June $30/$25 put spread for $2.
The risk is $2, and the potential reward is $3.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.