Industrial metal stocks have woken up from their long slumber, led by a U.S. Steel (X) bounce that could offer profits for well-timed positions. Receding fears of a Chinese economic downturn have given copper prices a lift, underpinning an oversold bounce following the metal’s steep decline off first-quarter highs. Iron ore isn’t cooperating with the uptick, at least yet, mired in a bear market decline that’s now reached a 7-month low.
President Trump boosted weak sentiment earlier this week, outlining infrastructure initiatives that follow up on 2016 campaign promises. Political chatter could underpin the group in coming weeks, but it’s unwise to expect an advance to new highs without positive growth metrics on several continents. As a result, trading profits are likely to require well-honed risk management skills and quick exits when technical bounces run out of steam.
Even so, this recovery wave could signal a long-lasting bottom for industrial metal stocks because their high percentage declines have shaken out the majority of short-term speculators. This cleansing process should allow a healthy rotation into stronger and more patient hands that expect industrial conditions to improve slowly over the next twelve to eighteen months.
Freeport-McMoRan, Inc. (FCX) bottomed out at $3.38 when the tech bubble burst in 2000 and entered a strong uptrend that posted an all-time high at $63.62 in 2008. It plunged with world markets during the economic collapse and bounced at the same trajectory as the decline, testing the rally high in 2011. That uptick stalled with three points of resistance, ahead of a multi-wave downtrend that found support at the 2000 low in the first quarter of 2016.
The stock charged higher into the second quarter, stalling at $14.06 and dropping into a trading range, ahead of a post-election breakout that reached an 18-month high at $17.06 in January 2017. It broke down from a double top pattern in March and dropped into a descending channel that found support near the November breakout in May. The stock held a recent test at that level, ahead of an uptick that’s now testing range resistance and the 50-day EMA near $12.25.
Price action since early 2016 has held a sequence of higher highs and higher lows, keeping the long-term recovery wave intact. Meanwhile, On Balance Volume (OBV) has settled near fourth-quarter 2016 levels. All in all, this points to a shakeout of November breakout buyers, raising the potential for higher prices in coming months. The long-term positive technical tone will deteriorate if the decline reaches single digits and the October 2016 low at $9.24.
Iron ore giant Cliff’s Natural Resources, Inc. (CLF) rallied from $1.85 to $121.95 between 2003 and 2008 and plummeted during the bear market, finding support in the lower teens, The subsequent recovery wave posted outstanding percentage gains but failed to reach the prior high, rolling over into a massive double top pattern that broke to the downside in 2014. That bearish event triggered even greater selling pressure, dropping the stock into near bankruptcy.
The steep decline finally ended at a 20-year low in January 2016, ahead of a steady advance that reached double top resistance in February 2017. The subsequent pullback has cut the stock price in half while shaking out a large supply of bottom fishers. Like Freeport, it’s also held the sequence of higher highs and higher lows, requiring a selloff to $4.91 to break the long-term positive technical outlook. The relatively weaker OBV is back to mid-2016 levels and needs to turn higher right here or risk setting off a fresh batch of sell signals.
The Bottom Line
Industrial metal stocks have turned higher this week, offering hope to anxious shareholders. While additional upside is likely, a long-lasting bottom will take time some to firm, advising extreme patience for market players with long-term time horizons.
<Disclosure: the author held positions in both stocks at the time of publication.>