Shares of North American iron ore producer Cleveland-Cliffs Inc. (CLF) opened the new year with a breakout to a two-year high in the double digits, raising investor hopes while generating a wave of bottoming calls. Unfortunately for bulls, a steady decline into June wiped out those gains while triggering a sizable year-to-date deficit. The technical outlook has not improved in recent months, with a bounce into September giving way to a critical test at the mid-year low near $5.50.

Higher steel prices have failed so far to energize the underperforming iron ore market, which is still trading well above the deep 2016 low, carving a long-term pattern that could signal an eventual bottom and new uptrend. However, current owners of Cliffs shares need to survive December tax selling pressure or risk getting caught in a large-scale breakdown that could generate much lower prices in the first half of 2018. (For a brief primer, check out: How the Iron Ore Market Works: Supply and Market Share.)

CLF Long-Term Chart (1986 – 2017)

 

Cliffs stock ended a five-year downtrend at a split-adjusted 75 cents in 1986, entering a long-term uptrend that continued into the 1998 high at $7.21. It turned sharply lower into the new millennium, finally bouncing at support near $1.70 a few months after the Sept. 11 attacks. The stock tested that level three times into the second half of 2013, finally bouncing in a powerful uptrend that generated three stock splits into the 2008 all-time high at $121.95.

A steep plunge during the economic collapse relinquished 90% of those gains before coming to rest in the lower teens in March 2009. The stock filled out a basing pattern into the second half of the year and took off in a recovery wave that posted healthy gains into 2011, when the rally stalled less than 20 points under the prior peak. The subsequent downtrend matched the intensity of the prior decline, finding support just four points above the 2009 low.

The stock broke that level in the second half of 2014, entering a climactic sell-off that undercut 2001 to 2003 range support by 51 cents in January 2016. That washout signaled a tradable low, ahead of strong 2016 price action that posted a tenfold gain into the February 2017 top at $12.37. The decline off that peak ended at the .618 Fibonacci rally retracement level near $5.50 in June, with that support level still being tested as we head into December. (For more, see: Cleveland-Cliffs Tops Q3 Earnings, Sales Estimates.)

CLF Short-Term Chart (2015 – 2017)

 

The downtrend into 2016 set off a 2B buy signal when it remounted broken 2008 support near $1.70. Healthy buying interest intensified following the presidential election, in hopes that promised infrastructure projects would underpin the troubled iron ore market. White House disorder and legislative delays contributed to the rally's end in February 2017, with D.C. inertia continuing to undermine already weak price action.

The bounce off the 2016 low looks impulsive, with strong volume signaling a possible first wave in a long-term uptrend, but stronger buying interest should have followed the decline into June. In turn, this raises the odds for a pattern failure that will set off major sell signals if harmonic support at $5.50 breaks in the coming weeks. Odds for that bearish outcome will increase into year end because the 2017 loss may encourage shareholders to take the tax selling deduction.

On-balance volume (OBV) highlights the dangerous technical setup for remaining bulls, entering a large-scale distribution wave in 2012, with buying pressure emerging at the start of 2016. The accumulation wave into 2017 ended right at the 50% indicator retracement level, while selling pressure into November has broken the June low and is holding just above the 2016 low, generating a bearish divergence. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Cleveland-Cliffs shareholders should remain on high alert through December tax selling season, watching critical support at $5.50 that needs to hold for bulls to maintain control and generate a healthy 2018 recovery wave. (For additional reading, check out: Cleveland-Cliffs Buys Remaining Equity Stake in Tilden Mine.)

<Disclosure: The author held a Cleveland-Cliffs position in a family account at the time of publication.>

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