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The basic materials sector has not been enjoying 2015 at all. Since the end of February, the Materials Select Sector SPDR ETF (NYSEArca: XLB) has dropped 11.75% and was down over 13.5% at its low before a recent rally.
The drop for U.S. Steel (NYSE: X) has been even more dramatic, with the stock falling over 25% year-to-date. It lost over a third of its value from the beginning of June to the low in July. U.S. Steel stock has rallied in the last week, but the question is, can it continue to rally?
Looking at the daily chart, there were a few items that jumped out at me. The first item was the steepness of the fall in June and July, which I have marked with the blue line. From June 3 through July 24, the stock dropped 28 out of 37 trading days. That is an unbelievable stretch of downward movement.
The second item that stood out was the low on July 27 and how it came at $15.68. We will see how important that is on the weekly and monthly charts.
The daily stochastic readings just made a bearish crossover, but the 10-day RSI still has a ways to go before it hits overbought levels. Given the amount of time the stochastic readings spent in oversold territory in the past two months, this development is less concerning.
Turning our attention to the weekly chart, we see the low on July 27 marked yet again, and we see how close it was to the low from April 2013. I also marked the recent lows in the stochastic readings, as well as the 10-week RSI, so that you can compare the oversold readings from the past 3 ½ years. Each time the RSI has gotten as low as it did in July, the stock has rallied at least 40% off its low.
You can also see that I included the volume on the weekly chart. The volume spiked sharply last week with nearly 100 million shares changing hands. We saw a similar volume spike when the stock bottomed and then bounced in January. You can also see how the stochastics readings just made a bullish crossover.
Finally, the monthly chart also shows the low in the $15.50-$15.70 area and how important the level has been over the last seven years. The tremendous drop in 2008-2009 stopped right in this same area. We also see that the monthly stochastic readings are in oversold territory.
Another factor in whether U.S. Steel is able to turn things around or not is the sentiment toward the stock. The short interest ratio currently stands at 5.10, which is bearishly skewed (bullish from a contrarian viewpoint). The analyst ratings show six “buys,” eight “holds” and five “sells.” The analyst ratings also point to bearish sentiment toward the stock.
From a fundamentals standpoint, U.S. Steel has struggled in recent years. Thus the reason for the price decline in the stock and the bearish sentiment. However, the company is expected to turn things around in 2016 with a pretty sizable profit predicted by the analysts.
Given this information, as well as the technical picture, I think now is the time to buy U.S. Steel stock as a long-term investment. I wouldn’t hold my breath on it getting back up to the $150 level anytime soon, but I think over the next two or three years you could easily see the stock double or triple in value.
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