Steel has been one of the hot commodities since the market's February bottom, with the Market Vectors Steel ETF (SLX) now more than 50% above its January lows and up 26% so far for 2016. The metal has also been one of the rare groups that achieved a higher low in February than January -- but now it looks to me like it's one of the first that's ready to roll over.
Of course, I have to reiterate that this is a market where we want to wait for triggers. Saying that something "looks like it's ready to roll over" is like saying that someone "looks suspicious." We don't convict people for merely looking suspicious, and we need to wait for action in a security rather than anticipating it based on looks alone.
Still, I'm drawn to SLX's divergences here, along with their potential should price follow suit. SLX has tested recent support trendlines, but the ETF's bulls have been able to hold things up so far:
The key here for SLX looks like the $24-a-share level. The ETF will lose not only its support trendlines with a close under $24, but also a 21-day simple moving average (SMA) that has come into play several times over the past four months. (While SLX is trading under its eight-day SMA, that's been more of a midpoint for trading, so I think it's a guide rather than a trigger.)
I've highlight the divergences worth examining in the chart above. The largest bearish divergence exists with the eight-period Relative Strength Index (RSI). The continued lower highs here indicate that momentum is struggling to push the stock forward.
We also have a loss in short-term trend via the Full Stochastics -- a bearish crossover plus the same lower highs. This could be a sign of consolidation, but there's no reason to buy SLX until we break $25.50 on the upside. (It's possible to buy the support line if you're willing to only give it 25 cents to the downside, but the risk appears to exceed the reward.)
SLX's longer-term trend isn't much better here. We've getting our first confirmation of the longer-term trend's struggle, as the MACD has crossed bearish and confirmed. The ETF hasn't historically performed well under that condition, but that doesn't necessarily mean that we'll see a large retracement. We could simply trade at $24 to $25 until the MACD improves.
Also note that SLX's StochRSI is still bullish, although it's threatening to cross under the 50-day SMA, which has been longer-term bearish. Think two to three months from now and we'll be back in the $19 to 21 range.
Add it all up and my current focus is on price. We're a bit in no man's land, but I believe SLX will make a fantastic short trade should it close under the 21-day SMA. I would also be willing to start a small partial position if the StochRSI crosses bearish. Given that this is measured over 50 periods, it isn't something to move easily, so one or two poor days won't have a big impact.
While I've used a broad brush to examine SLX, potential weakness ripples across the steel sector.
Reliance Steel (RS) and Nucor (NUE) look the most at-risk to me here. Names like US Steel (X), AKSteel (AKS) and Steel Dynamics (STLD) also resemble SLX and evoke caution or even sell signals, although Posco (PKX) is bucking the trend and looks like a buy.
The bottom line: If you want "in" on the steel sector (whether long or short), look for a bullish divergence like PKX or exaggerated weaknesses like NUE or RS.