The price of Cliffs Natural Resources (CLF) has soared in recent days, doubling after a multiyear decline.
In the daily chart of Cliffs Natural Resources, above, prices have quickly climbed over the 50-day and 200-day moving averages. There was a small improvement in the On Balance Volume (OBV) line and prices have gotten rapidly overbought, another way of saying they have gone up too fast.
Sometimes in the early stages of a bull market, a security gets overbought and stays overbought as investors look beyond the short-term indicators. In other circumstances, an overbought stock corrects to the downside, or at least sideways. Using the slow stochastic indicator, which is one measure of overbought and oversold, I believe prices have gotten ahead of themselves.
In the point-and-figure chart above, we only plot price reversals. Notice how long the downtrend in Cliffs Natural Resources has been in effect. Catching a stock early in a strong up move can be terrific, but going long a stock just before it has a downward correction is no fun.
Because the downtrend has been in effect for so long, I would like to see more of a base or reversal pattern for Cliffs Natural Resource before committing to the long side. A return to the $2.50 area would be in order and a logical place to look at the long side. For now, patience.