Cleveland-Cliffs Could Ride Commodity Wave

Rising inflation has extended into the lowly iron ore market, lifting American producer Cleveland-Cliffs Inc. (CLF) to the highest high since January 2018. More importantly, the uptick may complete a bottoming pattern and breakout that generates the first rally into the mid-teens since 2014. That would be welcome news for long-suffering shareholders, following a period of gross underperformance that has now entered its eighth year.

The stock hasn't touched the 50-month exponential moving average (EMA) since 2012, when a downturn broke that support level, ahead of a brutal decline that ended at a 29-year low in 2016. The moving average is situated less than three points above this week's price action near $9.00, setting up an opportunity for a breakout that establishes the first long-term uptrend since 2008. However, the iron giant has failed innumerable attempts to reach higher ground in recent years, so skepticism is advised while this testing process unfolds. (See also: 8 Contrarian Stock Picks for a Rocky Market: CS.)

CLF Long-Term Chart (1998 – 2018)

A steep decline ended at an all-time low at 75 cents in 1986, giving way to a long-term uptrend that topped out just above $7.00 in 1998. Bears then took control, generating a persistent downtrend that ended within a buck of the prior low at the start of 2001. Four tests at that level into the middle of 2003 completed a bottoming pattern at the same time the commodity sector caught fire. The stock took off in sympathy, carving a historic advance into 2008's all-time high at $121.95.

A vertical plunge during the economic collapse found support at $11.80 in March 2009, with that level coming back into play in 2014, 2017 and 2018. A recovery wave into 2011 stalled 20 points below the 2008 peak, carving a lower high in the multi-year pattern, ahead of a persistent bear market that continued into the first quarter of 2016. The stock turned higher with other commodity-driven issues into 2017, topping out at $12.37 in February.

The monthly stochastics oscillator completed a 12-month selling cycle in June 2017, while the subsequent buying cycle still hasn't reached the overbought level, nearly one year later. The multi-wave pattern embedded within this cycle is bullish, signaling resilience despite weak price action into the start of 2018. It also predicts a final buying wave into the overbought level that may coincide with a rally into the mid-teens. (For more, see: Stochastics: An Accurate Buy and Sell Indicator.)

CLF Short-Term Chart (2016 – 2018)

The stock found support at a shallow trendline after the February 2017 peak, testing that level four times into May 2018. The two bounces during this period stalled at $8.77 and $9.15, respectively, while price action crossed above $9.00 earlier this week. Bears see this resistance level and will likely generate a reversal into this month's end. However, bulls could then step up, grind out a higher low and proceed with a breakout into the double digits. 

A triple top breakout is likely to reach the 2017 high just above $12.00. A Fibonacci grid stretched across the 2013 into 2016 selling wave places the .382 retracement right at that level, with resistance reinforced by the 2009 bear market low and 50-month EMA. The triple whammy suggests that it will take time for the stock to clear overhead supply, but once accomplished, the rally door will opens to the 50% retracement at $15.11. Just keep in mind that this might not happen before 2019, at the earliest.

On-balance volume (OBV) posted an all-time high at the start of 2012 and plunged in a historic distribution wave that continued into the second half of 2015. It turned higher in 2016 and topped out with price in the first quarter of 2017. Sellers took control into April 2018, while the subsequent uptick still hasn't ended the strong of lower highs. This tells market players to curb their enthusiasm because it may take several more years for Cliffs to return to its winning ways.

[Check out Chapter 4 of the Technical Analysis course on the Investopedia Academy to learn more about using supplemental indicators to analyze stock charts]

The Bottom Line

Cleveland-Cliffs has awoken from a long slumber and rallied to base resistance for the third time since September 2017. Odds for a breakout are increasing, setting the stage for a more important test of bull power at the 2017 high above $12.00. (For additional reading, check out: How the Iron Ore Market Works: Supply and Market Share.)

<Disclosure: The author held the stock in a family account at the time of publication.>