While coal continues to struggle, steel seemed to be avoiding the same weakness. Many names, including the Market Vectors Steel ETF (SLX) have seen moves of 10% to 20% over the last six to eight weeks, but there appear to be some potential cracks in the armor in the near term.
The SLX ETF hasn't broken down yet, but the potential for a reversal lower has increased significantly. Price is clinging to support at $35.35. There are two ways to look at the current price pattern. It is possible we have nothing more than a falling wedge here, so a move back over $35.75 would be bullish. However, this could be seen more like a house or even the dreaded head-and-shoulders pattern. A break below the $35.35 would then be bearish as it triggers that pattern, not to mention that it would put price below the uptrend line, began in April.
While bulls want to argue a falling wedge here, the secondary indicators are split. The relative strength index (RSI) is falling, but is still above 50, so that's a plus for the bulls; however, the slow stochastics and vortex indicator are solidly bearish. At best, one could argue trend and momentum are undecided, but that's not what you want to see in an uptrend.
Steel Dynamics (STLD) looks the weakest of the largest five or six steel-related names. The stock has already lost price support of a bullish channel over the last two months as well as a wedge over the last month. The RSI is still barely above 50, but if we see price drop just another five or 10 cents, that should dip below 50. Under 50 on the RSI has been a very tough place for STLD bulls on the daily chart.
The stochastics and vortex indicator on STLD are very similar to SLX. While downside potential doesn't look significant, a retest of $20 is not out of the question here. In fact, that's what I'm looking for on STLD. If the stock is able to get back over $22, I might even get a little bullish again. At the very least, bulls need to recover back over $21.75. There, I could definitely argue the chart is neutral. Still, in this environment, we don't need to try and dig way into a chart just to find a neutral argument in order to justify a buy or a hold. There are simply too many other charts out there with strength to make an excuse to buy a chart that is average at best.
I still find it tough to short much outright, but some puts on STLD could offer a decent hedge on a portfolio, especially one heavy in materials and energy.