A Look at the Steel Index

Sep 10, 2008: 12:36 PM CST

Not too long ago, a reader asked me to take a look and discuss the Steel Index for any insights.  Presented below is the current daily and weekly structure of the Dow Jones Steel Index.  One could look at X (US Steel) for a stock that is very similar to this broader index.

DJUSST Weekly:

The larger timeframe price structure shows a consolidation pattern for the majority of 2007 which broke to the upside in 2008 and achieved its target before forming resistance at 550, failing numerous tests of this level, and then plunging sharply to the downside throughout the more recent part of 2008.

Price failed first (quickly) at the rising 20 period EMA which set up a test of the rising 50 week EMA.  In an uptrend, these areas are expected to hold as initial support for price (and can set up low-risk trade entries).  Price did try to rally on a test of the 50 week EMA but found resistance at the (then) falling 20 EMA before reversing and falling sharply to test the rising 200 week SMA.

Generally, moving averages help assess the structure of price and can also be used to set up targets and entries.  Once a trend is in the process of reversing, it will retrace sharper to deeper (larger) moving average periods.  In the case of an uptrend, the 50 EMA is often the last line of defense, and if this area is broken, a high probability test of the rising 200 SMA is often due – it is a good place to enter a trade with a little bit of a higher target.  This pattern tends to repeat itself on multiple time frames.

So with the violation of the 50 EMA, a test of the 200 SMA was set-up which culminated quite rapidly.  Price is currently find support and could mount a reversal/retracement off this level.  If you just looked at the daily chart, you might think price reversed at a random price point – it didn’t.

DJUSST Daily:

In addition to the weekly 200 SMA, price found likely support at the 300 (round number) index level.  An eventual test of the falling 20 period EMA – or roughly index level 360 – is certainly not out of the question and might actually be the higher probability play.

Take a look at X (US Steel – not shown in this post).  It shows an almost identical pattern to the DJUSST index (and rightly so).  Though the stock recently peaked at $195 in June, price has given up half its value and now stands at $100 per share after hitting a low yesterday of $95 per share.  If you can’t wait to get long X, now might be a good entry if you’re aggressive.

Although I marked a failed swing divergence on the chart (the expectation was that price should reverse at the 380 level thanks to the positive divergence), if you compare the oscillator low in September to that of July, and then note that price is quite lower now than it was there, then you have a positive swing divergence on the daily chart in addition to a potential positive momentum (large scale) divergence on the weekly chart.  That could add some fuel to the bullish camp if buyers step in at these levels.

Continue to watch this to see if this development plays out as anticipated, or what the structure evolves into.

1 Comment

One Response to “A Look at the Steel Index”

  1. Man4urheart Says:

    Thank you for your view! I really appreciate it!