Steel stocks have surged higher since hitting 2017 lows in June and look set to challenge rally highs put in place following the post-election buying spree. Ohio-based AK Steel Holding Corporation (AKS) has lagged badly during the summer bounce but could now play catch-up, joining its peers in a slow but steady uptrend that could last for several years. As a result, getting in on the ground floor could offer outsized returns for bottom fishers with long-term holding periods.
The fate of AK Steel is tied closely to the U.S. automobile industry, with that sector surging higher after Hurricane Harvey flooded Southeast Texas, destroying an estimated 500,000 automobiles that will require replacement in the coming months. Add the possibility of tariffs to protect the U.S. steel industry, and the group has the right chemistry to build on gains through the rest of 2017 and beyond. (See also: AK Steel Earnings and Revenues Beat Estimates in Q2.)
AKS Long-Term Chart (1994 – 2017)
The company came public at $11.75 in 1994 and sold off quickly to $9.63. The stock then entered a broad uptrend, gaining ground into the 1999 top at $29.63. Aggressive sellers took control into the new millennium, generating a steep decline that persisted through the dotcom bear market and into the 2003 low at $1.74. That price level is helpful to keep in mind because it came back into play more than 12 years later.
The stock charged higher during the mid-decade bull market, posting superior gains into 2008 when the uptrend fizzled out at an all-time high in the low $70s. A minor pullback accelerated into a full-blown selling panic during the economic collapse, dumping nearly 50 points in three months before bottoming out at $5.20 in November. A March 2009 test at that level found willing buyers, completing a double bottom reversal ahead of a bounce that stalled in the mid-$20s in 2010. That peak marked the highest high in the past seven years. (For more, see: Assessing AK Steel Stock Valuation.)
The stock broke the bear market low in 2013 and dropped into a persistent decline that may have ended in January 2016 when it bounced 10 cents below the 2003 low. The subsequent uptick finally ended the eight-year string of lower highs and lower lows when it reached the 2014 high at $11.37 in December, with that resistance level triggering a pullback into the second half of 2017. It posted a nine-month low in August while the monthly stochastics oscillator crossed into its first buying cycle since August 2016.
AKS Short-Term Chart (2014 – 2017)
A Fibonacci grid stretched across the 2014 into 2016 decline organizes price action, with the 2017 pullback reaching the .618 retracement level in May. It undercut that level in August but turned higher into September, setting off a 2B buying signal that denotes the failure of bears to defend a new resistance level. It will now take a buying spike into the June high at $7.04 to complete a double bottom reversal that may signal the start of a stronger recovery wave targeting six-year resistance near $11.50. (See also: Steel Stocks Near Upside Breakout Points.)
On-balance volume (OBV) posted a multi-year high in the fourth quarter of 2016 and entered an aggressive distribution wave, dumping to a multi-decade low last month. It will take months or years to overcome this deficit, telling informed market players that extreme patience will be required to benefit from long-term positions. In the shorter term, a bounce into year end could reward swing trading positions with opportune profits while the indicator lifts into a test of the broken 2016 low.
The Bottom Line
AK Steel has underperformed its peers in recent years but should benefit from the sector’s broad recovery as well as Hurricane Harvey, which could force U.S. automakers to rebuild inventories to satisfy intense short-term demand from the destruction of an estimated half million units. (For additional reading, check out: U.S. Steel Stocks Gain After Report on Import Tariffs.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>