United States Steel Corporation (X) beat analysts' earnings per share estimates when it reported results after the close on Thursday, Aug. 1. However, the stock opened Friday, Aug. 2, below its 50-day simple moving average at $14.28.
It has been a mixed picture for the steel industry since tariffs were set. U.S. Steel may have beat on earnings, but the company also announced that two blast furnaces will be idled in the coming months.
The 25% tariff on imported steel was set in March 2018 and was supposed to help domestic steel producers, but some say that this strategy has not worked. The tariffs raised the cost of production for companies using steel such as the automobile and the oil and gas industries. As these industries slow, demand for steel declines. For U.S. Steel, concerns are that its $1.6 billion investment in expansion is drawing down its needed cash.
The stock is fundamentally cheap with a P/E ratio of just 3.21 and a dividend yield of 1.38%, according to Macrotrends. The stock closed Friday, Aug. 2, at $13.27, down 27.2% year to date and in bear market territory at 46.4% below its 2019 high of $24.74 set on Feb. 21.
The daily chart for U.S. Steel
The daily chart for U.S. Steel shows the stock has been below a "death cross" since Aug. 13, 2018, when the 50-day simple moving average fell below the 200-day simple moving, indicating that lower prices lie ahead. This negative signal has been tracking the stock lower all the way to the May 31 low of $11.67.
The close of $15.31 on June 28 was an important input to my proprietary analytics and resulted in semiannual and quarterly risky levels at $23.56 and $28.89, respectively. The close of $15.03 on July 31 was another input that resulted in a monthly value level for August at $11.49.
The 2019 low of $21.00 was set on May 11 as a potential double bottom. The close of $21.55 on Dec. 31 was the year-end input to my proprietary analytics. The annual value level remains below the chart at $16.60. Note how the stock failed at its 200-day simple moving average at $24.74 on Monday. The 50-day and 200-day simple moving averages are now at $14.28 and $19.39, respectively.
The weekly chart for U.S. Steel
The weekly chart for U.S. Steel is neutral, with the stock below its five-week modified moving average at $14.55 and well below its 200-week simple moving average, or "reversion to the mean," at $24.13. The 12 x 3 x 3 weekly slow stochastic reading rose to 50.51 last week, up from 47.66 on July 26. Back at the May 31 low, this reading was 8.56, below the 10.00 threshold as a stock that was "too cheap to ignore."
Trading strategy: Buy U.S. Steel shares on weakness to the monthly value level at $11.49 and reduce holdings on strength to the 200-day and 200-week simple moving averages at $19.39 and $24.13, respectively.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on July 31. The quarterly level was changed at the end of June.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.