Cleveland-Cliffs Inc. (CLF) stock rallied to a five-week high on Wednesday in reaction to growing optimism that China will resume a strong growth trajectory after months of weak economic data. The stock took its clues from the iron ore market, which is now testing the 2017 high in the mid-$90s. The rally could signal a more fruitful period for the Ohio-based miner, which is still trading more than 110 points below 2008's all-time high at $122.
The iron ore market posted an all-time high near $200 in 2011, at the same time that a multi-year commodities uptrend was coming to an end, and crashed more than 70% into 2016. The furious pace of a Chinese infrastructure build-out in the last decade underpinned all sorts of industrial stocks and metals contracts, which topped out in unison when GDP numbers in the Asian nation began to contract.
Cleveland-Cliffs stock has been testing six-year resistance at the 50-month exponential moving average (EMA) since stalling at that formidable barrier in 2017 and requires a buying spike above $12.50 to establish the bullish technicals needed to attract institutional capital. It's unlikely to accomplish that task without a longer-term resumption of Chinese growth, which may not be in the cards until at least 2020. More importantly, the fate of both Chinese and American growth hangs in the balance while trade negotiations stretch into their fourth month.
CLF Long-Term Chart (1998 – 2019)
A multi-year uptrend stalled just above $7.00 in 1998, giving way to a steep decline that posted a 14-year low at $1.71 at the start of 2001. It tested that price level twice into 2003 and turned sharply higher, entering a powerful trend advance that mounted the prior high one year later. The stock posted exceptional gains throughout the mid-decade bull market, hitting an all-time high at $121.95 in July 2008.
It sold off an astounding 90% during the economic collapse before coming to rest at $11.80 in March 2009. That marked an excellent buying opportunity, ahead of a massive recovery wave that stalled just 20 points from the prior high in 2011. A long-term downtrend then took control, breaking 2009 support in 2014 and the 2001 low in the fourth quarter of 2015. Selling pressure finally ended at a 28-year low in January 2016.
The subsequent recovery wave stalled within three points of narrowly aligned resistance at the 50-month EMA and broken 2009 low in March 2017, easing into a broad trading range with support below $6.00. A 2018 breakout attempt failed within one point of the 2017 high, generating a pullback that may have posted a higher low in December. If so, that will mark the third higher low off 2016's multi-decade low.
The monthly stochastics oscillator reached the overbought level in August 2018, after a one-year buy cycle, and crossed into a sell cycle that ended well above the oversold level in February 2019. The new buy cycle generated a bullish divergence because the stock fell nearly 25% between early February and late March, but this buying power is finally coming on line, yielding a tailwind that should support higher prices.
While the current uptick looks bullish, the stock has a long way to go to enter a sustained uptrend. For starters, it remains stuck below the 2013 low (upper red line) near $15, predicting that a breakout above the 50-month EMA still stall quickly in the mid-teens. And unfortunately for bulls, massive overhead supply continues up to $20, where resistance at the descending 200-month EMA could take years to overcome. It hasn't tested that level since a 2013 breakdown.
The Bottom Line
Cleveland-Cliffs stock is gaining ground in reaction to growing optimism that China will resume its growth trajectory, but many layers of overhead supply will likely slow or stall the uptick.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.