Early Signs of Strength in Steel

Over the past few months, I have highlighted some sectors -- including technology, homebuilders and biotech -- in which excess selling and negative sentiment washed out most of the sellers.

All were very oversold, and more importantly, they stopped going down on negative news. Since then, they have continued to get positive accumulation and institutional money flow.

I've said that reaction to news is more important than the news itself, and it is one of the first signs to seek when evaluating a sector or a stock. Last week, I noticed another sector that has stopped reacting to negative news: steel.

The steel sector made an intermediate-term top and started rolling over to the downside in May. Last week, most of the major companies in the sector held major support levels and then quickly reversed to the upside over the past few trading days. This is one of the first signs that a sector or stock has washed out the weak holders and has some upside potential.

Let's take a look at a few situations.

U.S. Steel (X - commentary - Cramer's Take) has been in a downtrend since May. You can see the climax selloff at the end of September and the quick reversal on high volume over the past few trading days.

Its clear move above the 200- and 50-day moving averages successfully breaks the downtrend and shows solid institutional support for the stock. A few days of rest or a slight pullback could set the stage for assault on the $70 level.

Nucor (NUE - commentary - Cramer's Take) has also successfully held critical support levels that were tested in late September. It then reversed its downtrend and broke above the 50-day moving average on high volume. It will have to deal with some resistance around $55. If it can clear that level, then the May highs would be the next target.

Allegheny Technologies (ATI - commentary - Cramer's Take) has one of the better-looking technical patterns in the group. It has been forming an ascending triangle over the past several months. It proceeded to break out of the formation Monday on solid volume. It may have to consolidate some before it can successfully break above the $70 resistance level. After that, I see no reason why it couldn't make a move back to the May highs.

Pohang Iron & Steel (PKX - commentary - Cramer's Take) has not yet moved out of its consolidation pattern. However, it looks like some institutional sponsorship is developing in the stock. That will be confirmed if it can overtake the $67.50 area.

Many traders are proclaiming the death of commodities, and now we're seeing an upside breakout in the face of all this bad news. This may be a sign that the commodity move is far from over.

I said that I would become more interested again in the oil sector when investors wanted nothing to do with the stocks. Well, over the past week, many are calling for a possible bottom in these stocks. I'm not sure I am buying that prediction just yet.

I don't think all of the weak hands have been washed out yet. I also think a lot of mutual funds may want to get these companies off their books going into the end of their reporting period. I'll need to see some follow through before I buy into a bottom here.

---

At time of publication, Manning had no positions in any of the stocks mentioned in this column, although holdings can change at any time. Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.