The year 2022 hasn't been the kindest for investors. Not so for many commodity stocks like STLD stock. They have been ripe for swing trading, but it hasn't been easy lately. Accelerating sector rotations have made progress challenging.
Swing Trading Example: STLD Stock
With regard to commodity stocks, consider this: Roughly 15% of IBD's 197 Industry Groups have a positive year-to-date return for 2022. Commodities dominate that select group and include the steel producers like Steel Dynamics. Overall market weakness made the gains in commodity stocks stand out even more.
More recently, STLD stock carved out a 38% deep base in the second quarter of this year. As it started working on the right side of the base, its rebound was lackluster. While the major indexes started crossing their 50-day moving average lines on July 19, STLD stock was about 10 days behind (1).
STLD stock started to set up in early August. However, when it bounced (2) it wasn't from much of pullback. It didn't even touch its 10-day line.
But when the stock market indexes started pulling back after Aug. 16, commodities began looking better again. STLD stock came down to its 21-day line (3) and reversed. As it followed up on the reversal with even more gains the next day, it saw its already strong relative strength line get even stronger and volume come in at the highest level in over two months (4). We put STLD stock on SwingTrader at 85.62 early in the trading session.
Sector Rotation And Trendless Trades
We saw a nice show of strength from STLD stock the next day, but it didn't last (5). We took our first third of profit at 87.76 early in the session after achieving a 2.5% gain. The stock went up nearly a point after that but gave it all back and then some. It was still up slightly for the day but looked a bit like stalling action, with volume remaining heavy.
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The following day (6) didn't give up much ground, and STLD stock stayed well above its five-day moving average. But then it came down through both the five- and 10-day lines the next session (7).
We saw our gains evaporate and the turn negative so we exited the remainder of the position at 83.18. Because of our earlier profit-taking, we only lost 1% on the trade. And our quick exit saved us from an additional 10% loss over the next couple of days.
It's a reminder that sector rotation is moving quicker lately. Trends aren't lasting long enough to put the odds in your favor. Breakouts are continuing to fail soon after resistance is breached. Our lower exposure saved us from the worst effects of these traits and it continues to make us cautious.
That includes when STLD stock set up up more recently with another bounce (8). It may work, but one of the flaws we saw was that volume came in lighter on the up days after Labor Day vs. the volume on the down days before Labor Day. That's not a combination for conviction.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
