Steel Yourself

I see a repeat of 2011 here.

Bull vs Bear Battleground: A Tour Through SLX

The materials sector is one of the best areas for both bulls and bears right now, and I say both because there will be a spectacular move from here. I think the evidence weights bearish and points to major declines in many steelmarkers and related companies. On the flip side, there are still some bullish formations that if completed, would point to major gains in the sector. Or at least, if these bearish formations fail, it would invalidate the harsher bear forecasts for the global economy.

My base macro case is that the U.S. dollar will rally. Developed market currencies will depreciate. Emerging market currencies could implode. China's economy is slowing and at risk of tipping into a full-on recession with negative GDP growth or at least major sector damage. Some secondary evidence is the housing markets in Canada and Australia being extensions of the China/commodities slowdown. Drilling down to steel itself, China has been boosting production to lift its GDP. Assuming China does slow, a massive wave of steel will eventually pour out of China and hammer the global steel industry. Or if every nation throws up high tariffs, China will choke on its own production and iron ore demand will fall through the floor.

With the VanEck Steel ETF (SLX), the measured move indicated by the chart suggests my macro case is at least correct in size. China will either accelerate or decelerate, the chart says whichever way it moves will be explosive. I view the charts and macro as reflexive, that is to say I'm becoming more confident in a bold bearish call on China as charts of steelmakers (as one example) look increasingly bearish.

The long-term pattern on SLX looks like a monster inverted H&S. If SLX were to rally past the $46 area, it would open up a move to the $75 area and that would open up a move back to the all-time high on this ETF. The macro case for such a move is the central banks succeed in generating an inflationary global growth cycle beyond anything seen over the past decade. Commodities and material prices rally as they did in the early 2000s. China's economy rebounds and there's enough growth to go around, trade wars or not.

This inverted H&S pattern experienced a false breakout from February to May 2018. The timing is important because this overlays with the broader stock market being in a trading range since January 2018 (the widening megaphone). My assumption is both this pattern in SLX and the broader market are related.

Drilling into the shorter-term, the developing H&S pattern since November 2016 also correlates with the broader market. The S&P 500 Index was trading at the same level in December 2014 and in the days before Election Day 2016. For those looking for the hand of the central bankers, October 2014 was the end of quantitative easing by the Federal Reserve. October 2017 was when the Fed began reducing its balance sheet.

This pattern has completed and a retest of former support (now resistance) is underway. If this pattern is not violated with a break of resistance, the expected move is a roughly 50 percent decline from current levels.

With all that said, let's take a tour through the listed steel industry via an ETF, VanEck Steel (SLX). SLX isn't very heavily traded and doesn't have many options traded, but some of the holdings are liquid. Many of these holdings also appear in SPDR S&P Metals & Mining (XME). I will go through the charts in alphabetical order. Full disclosure: I am currently short STLD, ATI and NUE, and was short CMC in the recent past.

First up is AK Steel (AKS). This looks like a triple bottom, but Slopecharts let's me adjust the Y-axis. If this is actually a topping pattern, I'm afraid this company might be going bankrupt.

Allegheny Technology (ATI). I missed the break, but added puts last week. The topping pattern since August 2017 is what I'm focused on here. The target for this pattern is in the $14 area, I slapped on a horizontal around possible support. However, there's a similarity to AKS that suggests larger losses in the context of a 50-percent move in SLX.

Cleveland Cliffs (CLF), an iron ore miner. This chart has some bullish potential. The pattern since 2016 looks similar to precious metals miners. However, the uptrend was violated last week. Would like to see another break there for a clear bear signal.

Commercial Metals (CMC). There's a small inverse H&S pattern potentially forming.

Here's a great bull-bear chart from Carpenter Technology (CRS). There are three topping patterns since 2008, but also a rising trendline of support. Even if this is an ultimately bullish pattern, it could drop about 20 percent to the horizontal first.

Gerdau SA (GGB). Above $3.73 (the horizontal) looks bullish. Break the smaller horizontal at $2.45 and good night Gracie, the 2001 low near $0.25 opens up.

ArcelorMittor (MT). Massive wedge. Long-term support and resistance cross in March 2022. Won't have to wait that long for a resolution.

Nucor (NUE). This stock is relatively strong. Above $60 and it looks bullish. It recently touched the underside of support from the 2003 low. Major support back to the early 1980s is about 20 percent below.

Posco (PKX). See MT above.

Rio Tinto (RTP). Violated, then retook trendline from 2016 low. Very bullish above $70, 40 percent above. Major support around $20, 60 percent below.

Gibraltar Industries (ROCK). Below $31.71 and it's a failed breakout. From the macro perspective, I like the potential. A failed breakout starts with a loss of more than 20 percent. Looking back, there is a failed breakout analog ahead of the 2008 collapse.

Reliance Steel (RS) is above resistance.

Ryerson (RYI)

Schnitzer Steel (SCHN)

Comphania Siderurgica Nacional (SID). A double towards $9 (blue horizonal) or a potential breakdown to sub-$1.

Steel Dynamics (STLD). Similar to Nucor.

SunCoke Energy (SXC).

Timken Steel (TMST)

Tenaris SA (TS)

Ternium SA (TX). I had a bunch of horizontals on here and tried the Fibonacci instead, and they were really close.

Vale (VALE)

Vedanta (VEDL). A fourth topping pattern in a little over a decade is completed.

Worthington Industries (WOR).

US Steel (X). I pulled the Y-axis to show the downside potential if this is topped out.

Olympic Steel (ZEUS)

South Korea on Edge

I was going to release this post later in the week, but seeing as the Kospi fell on Monday while the rest of the world's stock markets are rallying...

The bearish case for South Korea (stock market and currency): it is reliant on exports to China and the Chinese economy is in a cyclical slowdown, not a trade related blip. The prime macro asset here is the U.S. dollar. A China/global slowdown includes a stable/rising U.S. dollar. Given the position on the charts, one could take the other side of the argument. I believe the downside for $EWY exceeds the upside in a bullish scenario, there are likely better assets for those bearish on the dollar and bullish on emerging markets/China, but South Korea is still a great indicator.

Roughly half of South Korea's economy is exports and of that, more than one-quarter go to China.

Given the trading relationship, the won has been highly sensitive to the Chinese economy, but has become even more sensitive as speculators look for currencies that will suffer from a Chinese currency devaluation.
Reuters: South Korea's won is Asia's whipping boy in U.S.-China trade war

As trade tensions flared up between the world’s two largest economies last month and the Chinese yuan threatened to fall past the key 7-per-dollar level, the won slid to near 1,200 per dollar, its lowest since January 2017.

“The won is like a proxy currency to not only global growth sentiment but one that’s also related to U.S.-China trade talks,” said Park Sang-hyun, chief economist at Hi Investment & Securities in Seoul.

“It won’t be easy to keep the dollar/won level of 1,250 should the U.S.-China spat intensify, with possibly additional tariffs, for example.”

The won corrected along with the yuan and U.S. stocks in June, but all three remain in bull markets.

There's no end to the bull-bear debate over the U.S. dollar. One bearish case for the greenback is the Fed unleashes global quantitative easing and rescues the ECB, BOJ and PBoC. It goes from being "the cleanest dirty shirt in the laundry" to the dirtiest. Another dollar bearish scenario is the 10-year depression ends and inflationary growth returns. This could include stagflation in the developed economies, but primary industries (mining, agriculture, energy) are much larger portions of emerging market economies. They should see positive growth. Finally, the dollar has followed a roughly 18-year cycle going back to the 1980s, with roughly equal parts bull, bear and consolidation. The current bull market began in 2014 and would be likely to terminate over the next 12 to 18 months. It could dip and retrace back to current levels as it did in the early 2000s, but would not make a meaningful new high.

The charts also raise the possibility of an explosive (catastrophic for the global economy) dollar rally. If the Fed cuts rates, but the global central banks have to initiate extraordinary monetary policy because they have less room top cut (ECB,BOJ) or because their economies will suffer far greater losses in a recession (PBoC), the dollar should rally as it did in the early 2000s recession and during the 2008 financial crisis (yen being a potential outlier). Multi-year and multi-decade basing patterns are within striking distance even after the recent pullback in the dollar. The flipside of a dollar breakout would be inflationary pressure overseas as currencies devalue against the U.S. dollar. The extreme case is an echo of the 1930s when global currencies devalued versus gold. The country most similar to 1930s USA is China, but with more debt, less productive investment of that debt and worse demographics.

Along with the macro and currency case for South Korea, the South Korea ETF is at an important resistant level.

The China ETF is at a similar point.

There are only a handful of South Korea ADRs and even fewer with ample trading volume.