Chaikin, Not Stirred

The steel stocks have been notably underperforming over the past several months. To give you an idea of just how poorly the actual steel names have been acting, the two largest weighted holdings in the ETF for the steel sector ($SLX) are $RIO and $VALE, which are basic materials firms that deal with the inputs for steel. Despite $RIO and $VALE being relative broad market outperformers, the actual steel names have been too much of a drag on the $SLX for it to be one of the leaders in the beginning of the rally in September. Nonetheless, the $SLX finally, and quietly, broke out above multi-month resistance in early October. Not too long after the breakout, the ETF has spent the past two weeks retracing to fill the gap created by the breach of prior resistance.

One such indicator that is useful in determining the probability of whether the breakout will hold its retest is the Chaikin Money Flow (“CMF“). CMF seeks to gauge the strength of buying and selling pressure based on the Accumulation/Distribution Line over 21 periods (days, this case). In essence, it is a no nonsense way to judge the volume pattern and price action (price closing in the upper half of the day’s range has a bullish effect on the CMF reading, and vice-versa). Generally speaking, the CMF is bullish when positive and turning up, and bearish when negative and pointing down. You are also looking to see how long the CMF can hold in positive or negative territory, in order to confirm the potency of a bullish or bearish reading.

As you can see on the daily chart of the $SLX below, the steels have a bullish CMF reading, in conjunction with price bouncing off of the key breakout level on Friday. Perhaps what is most bullish is that the CMF was able to remain in an uptrend despite price correcting back to fill the gap over the past few weeks. Keep in mind, however, that CMF is best used only as a supplement to other aspects of technical analysis, rather than when looked at in a vacuum. In this case, I believe it to be sound evidence of an increased probability that the $SLX will hold its summer breakout and commence a new leg higher, as the ETF has seen steady accumulation.

Based on this bullish thesis, which individual steel stocks are the best plays? Stay tuned for my weekly setups on Sunday…

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