Liking Steel Here, Especially Siderurgica (SID) ~ market folly

Thursday, June 19, 2008

Liking Steel Here, Especially Siderurgica (SID)

Steel has had a nice pullback here and offers me a chance to finally get back in. I've been monitoring the situation closely because its had a monster run and I keep having to take profits. Not to mention, every pullback could potentially be a breakdown. So, you've got to be on the look out for divergences and overall investor sentiment to the sector. All the steel names look pretty similar on the charts. Most are at or around their 50 day moving averages. So, at the very least, you've got a nice risk reward play set up for a trade or a solid 1st entry point for a longer term position.

Charts not withstanding, I actually like Mechel (MTL) as my favorite steel play. They've got exposure to coking and steam coal, iron ore, nickel, steel and some coal through their mining unit. An added bonus is the fact that they're based out of Russia (and Lithuania and Romania) and it gives you some solid international exposure. But, I'm not adding here yet because the stock hasn't made an assertive move and has been hovering around support. So, I love the company, but the price action is looking a bit weird at the moment and I want to make sure its not breaking down.

While sorting through some other steel charts I saw Siderurgica (SID) and their chart is much more crisp and clean in terms of defined entry/exit points. So, I can get long now and then I already have a clean stop in place. If it breaks below, then its probably undergoing a short-term technical breakdown and is most likely going lower. MTL's chart is a bit conjested right now, while SID is cut and dry. I obviously like SID as well (that's why I was looking at the chart in the first place). So, while I wait for MTL to sort itself out, I'll use SID for my steel play. SID is a Brazilian based steel company so you can already see the direction I'm heading here: steel plays based in emerging markets.

At any rate, here's the chart of SID which offers you a nice play for a trade or investment, whichever suits your style. The green horizontal lines I've drawn in represent support/resistance lines. As you can see, SID bumped up against those resistance lines before eventually breaking through them. Then, after breaking out, the stock usually retraces and re-tests that line which is now future support & past resistance. Each time the stock has done this recently, its served as a solid entry point in terms of risk/reward and clean stop. The trend in this stock is up and should it break below our stop, then we know its breaking down for the near-term. Its up to you as to how conservative/loose you want to be with your stop, but you will want to place it just below the highest horizontal green line I've drawn in (our support line) at around $44 or so.

The rationale behind getting in these names plays out just as before. Global growth continues despite a US slowdown. Global infrastructure is a booming industry, as evidenced by the billions of backlog numerous international infrastructure companies have built up. Additionally, these steel producers currently have some degree of pricing power and are using it to their advantage. If you have witnessed the coal story explode onto the scene as of late, then you should also pay attention to steel. Because, after all, metallurgical coal is all about steel and the two stories are connected in that respect. I'm liking the steel producers in emerging markets simply because they are right smack dab in the middle of the growth and they are supplying those emerging markets themselves (as well as the rest of the world).

long a little SID here to see how it holds up in this shoddy market & will add more once it (hopefully) surges up away from the 50 day. Waiting a bit longer on MTL to see how it holds up here, as it might have possibly printed a double-top in its most recent run.


j. (marketfolly) said...

ya i'd heard about that, that's wild!

TraderMark said...

This is what makes a market

I like MTL chart better than SID

MTL looks like it bounced off 50 day
SID still up in the air

but in either we'd need to monitor because as you said, a pullback can always turn into a breakdown right quick.

I believe we might have the turn in commodities - China might have finally turned out the light on this round of ebulence. We'll see - I've been early by about 3 weeks :O so don't want to make any victory calls yet. Logic would dictate this is a spot for reversal but logic means nothing in market.

MTL > SID hehe

j. (marketfolly) said...

yup exactly, markets are wonderful. what i was seeing on MTL was a possible double top and then just overall indecision since its more up and down lately, choppy. but you're right in that its held its support so far.

SID has been less choppy, but is teetering on support rather than decidedly bouncing. both a quandary really.

and yea i'm worried about the china ordeal as well. these things can really light a fire once a catalyst comes and that's why i only started a small initial size here because things are looking somewhat shaky

TraderMark said...

what is interesting to me is the divergence between GGB and SID

From all I read GGB is the more integrated so could be a benefit as coking coal skyrockets the next year. But I am going off memory and could be mixing the two.

Usually these 2 trade together - GGB looks like it has no care in the world why SID drops hard. I find it curious.