Cleveland-Cliffs Poised for Big Move After Sudden Trump Steel Tariff Update

Who is the man of steel?

Superman? No, not exactly. President Donald Trump? Winner, winner, chicken dinner.

Readers have likely noticed that a number of U.S. steel stocks were trading higher ahead of the opening bell on Monday morning in New York. I have seen Cleveland-Cliffs CLF, Nucor NUE and Steel Dynamics STLD all up double digits (in percentage terms) from their closing prices this past Friday.

It all started a week or so ago, when the president finally got behind the proposed merger between Nippon Steel and U.S. Steel (X) as long as the headquarters would remain in Pittsburgh, Pennsylvania and there would be no U.S. layoffs. Nippon Steel will invest more than $14 billion in U.S. Steel over 14 months and operate as a separate company despite being wholly-owned subsidiary. The president also orchestrated a sort of "golden share" for the U.S. government where it will have approval over a number of board seats at the company.

Friday Night...

President Trump traveled to a U.S. Steel site at West Mifflin, Pennsylvania on Friday evening and spoke to U.S. steelworkers. He told his audience that he was doubling his tariffs on imported steel from 25% to 50%. The president said, "At 25%, they can sort of get over that fence. At 50%, they can no longer get over the fence."

Obviously, if these newly increased tariffs hold, and that is certainly a big "if" in this environment with this administration, it could and probably would mean increased business for U.S.-based steel producers. The way the government puts it, this is a matter of national security, so one would think that at least a significant portion of this increase could stick. That would be much to the chagrin of both Asian and European steel exporters. The EU has already complained and threatened countermeasures.

Worth a Look?

Are there any U.S. steel producers worth a look, technically, in light of this suddenly improved domestic environment?

Cleveland-Cliffs, despite some gnarly looking earnings and five consecutive quarters of year-over-year contractions in revenue generation, with its low potential point of entry, often grabs the attention of traders and investors. In fact, this piece could double as a "Stocks Under $10" column. That's how rough it's been for this, yes, Cleveland, Ohio based company.

Operating cash flow has been negative for three successive quarters and has been negative over the trailing 12-month period as of March. The firm has shown negative net income for five of the past six quarters on a GAAP basis and has an overwhelming debt load relative to cash on hand. That said, the technicals, which have been in decline, may just be ripe for a trade on the long side.

The Charts

It's been a tough year and change for CLF. There's no doubt about that. Let's zoom in on the last couple of months though:

Since early April, CLF has developed what looks like a falling-wedge pattern, which is a pattern of bullish reversal. Just last Friday, the stock found support at the lower trendline for a second time. On Monday morning, CLF will threaten to retake its 21-day EMA at $7.10 and it's 50-day SMA at $7.70. One would bring the swing crowd on board. The other could persuade portfolio managers with an interest to increase long-side exposure.

The stock went into the weekend with relative strength showing a technically oversold reading and a daily MACD that just spewed bearishness. The histogram of the nine-day EMA was negative as were the 12-day and 26-day EMAs with the 12-day line running below the 26-day line. It doesn't get much uglier than that.

Enter the man of steel. Does this change the game? It could and it would, if at least a large portion of these tariffs hold. Is there a trade? Good question.

Trade Idea (Minimal Lots)

Purchase 100 shares at the last sale of $7.10
Sell one covered July 18 $8 call for $0.45
This brings the net basis down to a rough $6.60. Being called away at $8 in July would be good for a profit of 21%.
Extra Credit: A trader could pick up $8 calls expiring this Friday for a song (about $0.12), just in case this thing takes on a life of its own.

At the time of publication, Guilfoyle had no positions in any securities mentioned.