3 steel stocks that are rusting out

Technical patterns look downright ugly in some areas, which is why these are strong possibilities for shorting.

By InvestorPlace Mar 3, 2014 11:01AM

Image: Home under construction (© Corbis)By Anthony Mirhaydari


I know what you're thinking: With stocks pushing into record territory -- breaking above uptrend resistance that's held the S&P 500 ($INX) at bay since November -- it seems like a crazy time to be looking for short-side opportunities. But steel stocks are presenting us with an opportunity nonetheless.


As I highlighted in a recent post, there are plenty of reasons to be cautious. Warning signs are flashing. Technical indicators are rolling over, such as market breadth. The trouble in emerging markets looks set to return as China's banking system shows signs of stress while Beijing pushes down the value of the yuan to an extent not seen since 2008. The economic data continues to disappoint. And the Federal Reserve seems determined to keep tapering its QE3 bond purchase program.


Moreover, I'm seeing leading sectors like steelmakers roll over into weak, vulnerable downtrend patterns that look susceptible to breakdowns.


While I'm not recommending a complete shift to a bearish stance -- instead, just pushing for caution and some profit taking -- I think the opportunities here present nice counter-trend opportunities for the few remaining contrarians out there. Here's a look at three shorts in the steel stocks space.

U.S. Steel

U.S. Steel (X), the giant that J.P. Morgan built more than 100 years ago, is rolling down out of a tilted head-and-shoulders reversal pattern that traces down to a price target near $20 a share -- which would be worth a 17 percent loss from here. That would take X stock back to its September trading range.


I've recommended the April $24 puts to my Edge Pro clients, and am adding a short position in X stock to my Edge Letter Sample Portfolio.


AK Steel

AK Steel (AKS) is threatening to fall out of a three-month pennant formation that could see shares drop all the way down to the $3.50 level -- which here where the next significant volume-by-price support lies. That would be worth a 44 percent drop from current levels.

I've recommended the March $6 puts -- which are only trading around 27 cents -- to maximize leverage on what could potentially be a dramatic drop.


I've also added a short position to the Edge Sample Portfolio.


ArcelorMittal

ArcelorMittal (MT) looks ready to drop out of a five-month-old rounded-top pattern after losing volume-by-price support near $17 a share. This is going to be a slower =0moving position, but I'm still looking for a possible decline to support near $12.50 -- which would be worth a 20 percent-plus drop from here.



I've recommended the March $14 puts to my Edge Pro clients.


More From InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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