The shares of Cliffs Natural Resources (CLF) peaked way back in 2011 at over $100 and suffered a huge decline to the very low single digits earlier this year. Prices racked up a big percentage move to the upside the past three months, but a much-needed correction has begun. Should we look to buy this pullback or keep our powder dry?
In this daily chart of CLF, above, we can see a rounded bottom or saucer bottom in the November to March time frame. Prices turned up in March along with the 50-day moving average line and the On-Balance-Volume line. Prices even rallied over the 200-day average and the slope of this lagging indicator has flattened out. In the lower panel of this chart, above, we can see a small bearish divergence between the higher highs in April and the lower highs from the momentum study. Stocks that lose a huge percentage of their market price typically need a much longer repair period than stocks losing smaller percentages. Or to say it another way -- a five-month bottom pattern is just not enough.
In this weekly chart of CLF, above, going back three years, we can see just part of the huge decline noted above. Here we can see that prices have rallied above the 40-week moving average line, but the OBV line has barely moved and the Moving Average Convergence Divergence (MACD) oscillator has just gotten back to the zero line. It may take a while, but we would wait for CLF to correct down to around the $3 area before stepping in to buy. Why so low? Simple: At $3, we can put in a sell-stop at $2.75, there I would know that I was wrong and we could get out with a small loss.