Steel stocks rallied in late in 2016 following an earlier rally at the start of that year. In 2017, steel stocks have been pushed lower overall, but some recent strength has seen a number of steel stocks move to or break above resistance levels. This indicates the possibility of another rally to the upside.

Steel Dynamics, Inc. (STLD) had a near vertical ascent in late 2016, and since then, the stock has been moving in a descending channel. Channel resistance (top of channel) is $37, with a breakout above that helping to signal another advance. Over the past several months, declines have been rather muted, just barely pushing past prior lows before bouncing again. The May low of $32.93 was also higher than the April low of $32.15, indicating that some buying pressure may be building. The longer-term trend is up, and this pullback is quite mature in terms of time, which is why buying pressure is of particular interest now. If a breakout does occur, the first price target is $44.50 – a rally approximately equal to the early 2016 advance. Commodity-related stocks can have very aggressive rallies. If the upside breakout scenario plays out and the price moves above $44.50, consider the use of a trailing stop loss to capitalize on additional movement. (For more, see: Is Steel Dynamics a Great Stock for Value Investors?)

Steel Dynamics, Inc. (STLD) stock near breakout point in long-term uptrend

Nucor Corporation (NUE) demonstrates a similar pattern to Steel Dynamics. Nucor had a strong rally in late 2016 and has been moving in a descending channel since then. However, Steel Dynamics has been stronger in terms of performance, so Nucor is further away from its breakout point. Nucor needs to close above $64 to break out of its descending channel, but if Steel Dynamics breaks higher, traders could also consider buying Nucor on a break above $62.31 (April swing high). Since Steel Dynamics is the strongest, it could be a good strategy to sell Nucor when Steel Dynamics is approaching its target. Alternatively, traders could utilize a trailing stop loss, moving the stop loss to just below the prior swing low as the price moves up. (See also: Nucor Announces Plans to Build Galvanizing Line in Kentucky.)

Nucor Corporation (NUE) stock in range within long-term uptrend

AK Steel Holdings Corporation (AKS) has had a much more pronounced decline since it peaked at $11.39 in December. A descending trendline, marking the peaks of the decline since February, indicated resistance near $6.50. The price edged slightly above that on June 12 but then closed at $6.42 on June 13. Therefore, it is a bit premature to call this an upside breakout. Because AK Steel stock has been so weak recently relative to Steel Dynamics and Nucor, consider waiting for both of those other stocks to break out before considering buying AK Steel. AK Steel has greater volatility, both on the upside and the downside. If the upside breakout develops, hopefully with some confirmation from other steel stocks, consider taking partial profits in AK Steel at $8 (approximate width of channel added to breakout point), and hold the rest until Steel Dynamics or Nucor hit their exits. Alternatively, utilize a trailing stop loss, moving the stop loss to just below the prior swing low as the price moves up.

AK Steel Holding Corporation (AKS) breaking out of descending channel

The Bottom Line

A break to the upside would help signal another advance in these steel stocks. Upside price targets are based on current market conditions and patterns, but those change over time. Therefore, while it is good to have an idea of where to sell (at a profit and at a loss) going in, it is important to have a contingency plan in case conditions begin to deteriorate again. A trailing stop loss may work in such situations. These stocks can be volatile, especially AK Steel, so it is wise only to risk a small percentage of account capital on any single trade. (See also: Top 4 Steel Stocks of 2017.)

Charts courtesy of Disclosure: The author does not have positions in the stocks mentioned.