Industrial metal stocks entered a major correction in early April and have lost considerable ground in the last month. This price action has led the broad averages, which finally broke down from three-week trading ranges in Tuesday's session. The downside leadership suggests that steel, iron and copper issues will eventually post much steeper losses than the
The metals' decline has an unintended benefit for observant traders and investors. Simply stated, these stocks should bottom out and turn higher ahead of the broad market, in the next legs of their long recoveries. But timing is everything in the financial markets, and I'm not recommending you buy the sector until it show signs it's bottoming out and ready to head higher.
failed its breakout over the January high on April 8. The reversal was a significant event that foretold similar turnarounds in other sector leaders. The stock has dropped in three distinct waves since that time and is now sitting at the 62% retracement of the February-into-April rally. It has also pulled into support at the 200-day moving average.
On the surface at least, this looks like a natural price level for the stock to stabilize, set up a basing pattern and eject in a recovery rally back up into the $60s. However, there's high risk in entering new positions too early because deep support levels can get tested for two to three weeks, at a minimum, before yielding a sustained reversal.
Also notice a wall of resistance near $57 generated by a two-week sideways pattern that was broken to the downside on Friday. I'd wait for a rally above that critical level prior to considering my first buy in a new uptrend. With downside momentum firmly in place, it's doubtful that uptick will happen this week, so sit back and be patient.
Many industrial metal stocks trade in tandem with the copper futures, because the red metal is a ubiquitous element in production and refining. The copper contract rallied above its January high in late March, held new territory for three weeks, and then broke down on April 16. It's dropped like a rock since that time and is now sitting at a two-month low.
The prior chart offers a useful template for the evolution of this decline. Like U.S. Steel, copper has also dropped into the 62% rally retracement and is trading just 2 points above its 200-day moving average this morning. However, downside momentum is severe and a selling climax into round-number support at $300 appears likely.
This selloff provides traders and investors with a major timing element when looking at industrial metals stocks as potential buying opportunities. In a nutshell, we can't bet on a strong sector recovery until the copper futures stop falling. Unfortunately, nothing on the copper chart is telling us the decline is over quite yet.
I warned readers about
in a February column that
between the mid-$60s and mid-$80s. That's exactly what's happened in the last two months, with the February bounce fizzling out under the January peak and giving way to an 18-point selloff.
Several charting elements warn readers to avoid long-term positions in this stock, even when the industrial metals correction comes to an end. First, it never rallied to a new 2010 high, as U.S. Steel and the copper futures did. Second, On-Balance Volume is stuck well under peak 2009 levels, pointing to steady distribution in a highly positive market environment.
Freeport has now dropped through the 200-day moving average near $74 and is flashing a variety of oversold signals that point to an eventual bounce that lifts price back up to the 50-day moving average, currently near $80. Such a move would offer a great swing trade, but don't get fooled into believing that the uptick, when it comes, marks the start of a new uptrend.
Finally, let's talk about
Cliffs Natural Resources
, my favorite sector play in 2010. The stock blew through the January high in February and kept on going, adding 21 points before topping out just two days prior to U.S. Steel's failed breakout. It then dropped into a sideways pattern and sold off hard after reporting earnings on April 28.
The high-volume selloff broke the 50-day moving average and has now dropped price through the 50% rally retracement. This is a progressive downtrend that could easily test the 200-day moving average near $50 in the next week or two. The bottom line: Don't be a hero and step into this buzzsaw, thinking you know when the decline is coming to an end.
Instead, use the January-into-February decline (red box) as a road map for this former leader's turnaround. That selloff dropped into $39.19 and gave way to a bounce that fizzled out at $45. The subsequent test at the low printed the "real" buy signal with a double-bottom reversal. Look for a similar pattern when Cliffs is finally ready to resume its uptrend
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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