Industrial metals stocks have come alive this holiday season, with many components lifting to multi-month and multi-year highs. Steel Dynamics, Inc. (STLD) is leading the charge, completing a nine-year cup and handle breakout that could generate outstanding 2018 returns. The Indiana-based metals recycler posted superior gains between 2003 and 2008 and could now be entering an equally fruitful period.
The Trump administration is expected to address multi-billion dollar infrastructure initiatives in the first quarter of 2018, giving a lift to U.S. steel producers, bridge builders and highway contractors. In addition, tariffs and other measures designed to protect the local steel industry against foreign dumping could finally take hold, allowing these companies to raise prices and increase profits for the first time this decade. (For more, see: How China Impacts the Global Steel Industry.)
STLD Long-Term Chart (1996 – 2017)
Steel Dynamics came public at a split-adjusted $4.53 in November 1996 and eased into a trading range between $4.00 and $7.20. It broke down in 1998 and entered a downtrend that continued into the new millennium, finally bottoming out at $2.07 in May 2000. The stock tested that level four times into the first half of 2003 and turned higher, entering a powerful trend advance that escalated through the mid-decade bull market.
The stock split twice during the historic ascent, finally topping out at $40.92 in June 2008. It then plunged with world markets during the economic collapse, finding support at a five-year low near $5.00 in November. That marked the lowest low in the past nine years, ahead of a healthy recovery wave that topped out just above $20 in 2010. That barrier contained bullish fervor until a July 2016 breakout that gathered force following the presidential election.
The uptick stalled within 85 cents of the 2008 high in December 2016, giving way to a relatively narrow trading range that completed the handle within a multi-year cup and handle pattern. The stock finally broke out on Dec. 8 and has now traded to a new high just below $44. While that is impressive, the depth of the cup yields a measured move target in the mid-$70s, signaling an outstanding long-term buying opportunity. (See also: Is Now the Time to Buy Steel Dynamics?)
STLD Short-Term Chart (2014 – 2017)
A July 2014 rally above 2010 resistance near $20 generated a December failed breakout, with persistent downside continuing into the first quarter of 2016. It bounced back to 2014 resistance in May of that year and broke out of a smaller-scale cup and handle six months later. That uptick completed a round trip into the prior decade's high in December 2016, giving way to sideways action that carved yet another cup and handle pattern ahead of this month's large-scale breakout.
On-balance volume (OBV) topped out in 2010 and rolled over, entering a long consolidation phase that ended with a breakout to a new high following the 2016 Brexit referendum. The buying surge generated a strongly bullish divergence, predicting that the price would eventually play catch-up. That bullish energy has now set into motion, confirmed by the indicator posting a series of new highs.
A pullback that reaches or breaks $40 may offer a low-risk buying opportunity in the first quarter of 2018. Of course, there are no guarantees that bears will succeed in generating that decline, given exceptionally strong December buying power. A high and narrow consolidation pattern lasting four to six weeks could offer an alternative low-risk entry strategy, with the buying signal going off when weekly stochastics completes a downswing and turns higher. (To learn more, see: Stochastics: An Accurate Buy and Sell Indicator.)
The Bottom Line
Steel Dynamics stock has broken out to an all-time high on heavy volume, setting the stage for a long-term uptrend that could last well into the new decade. This bullish price action bodes well for other local steel and industrial metal operations, including United States Steel Corporation (X), which is now trading at a nine-month high. (For additional reading, check out: Is It Time to Buy U.S. Steel?)
<Disclosure: the author held no positions in aforementioned securities at the time of publication.>