3 Commodity Stocks Struggle with Overhead Resistance

  • The bullish trend in commodity stocks is officially dead and bearish trades have the green light.
  • Alcoa (YY): Its stock price plunged after the earnings and is now showing a bearish flag pattern.
  • Newmont Mines (NMS): Gold stocks opened deep in the red on Monday.
  • Steel in the United States (X): Stock X formed a nasty bearish engulfing candle amid a strong distribution on Friday.

Commodity stocks have soared over the past two months as investors searched for ways to capitalize on inflation. They served as a refuge from the carnage in the Nasdaq and elsewhere. Unfortunately, the last two weeks have turned the script around and commodity stocks are now being skimmed. It’s a sign of how blind selling has gone.

Uptrends have been broken and the path of least resistance has moved down. Last week, the downside pressure eased, but most commodity stocks formed weak bearish flag patterns. And that makes them vulnerable to more downside. With former support areas looming as potential resistance, we are in an environment where selling tears seems smarter than buying dips.

Here are three stocks that could be good candidates for short games.

YY Alcoa $65.57
NMS Newmont Mines $72.30
X Steel in the United States $29.46

Alcoa (AA)

Source: TD Ameritrade’s thinkorswim® platform

It’s easy to forget how much Alcoa (NYSE:YY) stocks have exploded over the past year. Last July, AA stock stood at $31. At its peak six weeks ago, it nearly hit $100. The triple illustrates how well-loved commodities stocks have become. And it’s not like the uptrend was built on fluff. There was real earnings growth underlying the climb. Over the past four quarters, its earnings per share (EPS) have been $1.49, $2.05, $2.50 and $3.06.

That said, investors found the latest version lacking. AA stock plummeted 17% the day after the results, and it has struggled ever since. Last week’s bounce saw lower volume and weak bullish movement. He developed a bear flag pattern that ended Friday with a bearish engulfing bar. The next downside target is the 200-day moving average near $58.50.

To capitalize, buy sell spreads.

The exchange: Buy June Bearish Sell Spread $65/$60 for $2.10

You risk $2.10 to gain $2.90 if prices fall to $60 at expiration.

Newmont Mining (NEM)

Newmont Mining (NEM) stock chart with bear flag.

Source: TD Ameritrade’s thinkorswim® platform

Gold prices have seen a major unwind since breaking above $2,070 in early March. Given Monday’s decline, the yellow metal is now 10% off its high. Gold stocks followed suit and Newmont Mines (NYSE:NMS) is now in a daily downtrend below the 200-day and 50-day moving averages.

Bulls will say this is a deeper pullback from the long-term uptrend and therefore a buying opportunity. The bears will point to the multiple support levels that have been broken and suggest that they are now resistance areas. Both views have merit, but I am inclined to side with the sellers until we see price recover the 50-day moving average.

The next down leg could pull prices to $65.

The exchange: Buy the June $70/$65 put spread for $1.60.

You risk $1.60 to gain $3.40 if prices drop below $65.

United States Steel (X)

US Steel (X) stock chart with bear breakdown.

Source: TD Ameritrade’s thinkorswim® platform

Steel in the United States (NYSE:X) completes today’s hat trick for commodities stocks with one of the ugliest charts of the bunch. A triple top marked the end of its uptrend last month, and it has been sinking ever since. Last week’s earnings report was disappointing and resulted in a nasty bearish engulfing bar. So far in early trading Monday, prices continue to decline, completely ignoring the intraday rebound seen in the rest of the market.

The 200-day moving average is the next target, and I think the stock can get there quickly. If prices come back above the 50-day moving average, I will change tone. Otherwise, the lower we go down.

Usually X shares are pretty cheap for long puts. But the high implied volatility suggests that spreads are a better way.

The exchange: Buy the June $30/$25 put spread for $2.

The risk is $2 and the potential reward is $3.

As of the date of publication, Tyler Craig had (neither directly nor indirectly) any position in the securities mentioned in this article.

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Garland K. Long