Finding a bottom in a stock is every investor’s dream but at the same time a rare event. This is because bottoming formations take months or even years to develop but once they happen they can lead to great returns.
Bottoming is a process and it comes in different forms and shapes with the rarest one being the rounding bottom or “saucer”, as its shape resembles one. The saucer is characterized by a steady flattening of the downtrend to such a degree that the price at one moment enters a sideways range, but then starts to rise slowly and finally accelerates upward on high volume. We believe that this is what is currently happening to US Steel (ticker X). The monthly chart below shows the rounding bottom reversal pattern developing over the last 3 years.
Zooming closer into the chart and by using a weekly chart we can see that US Steel broke above long-term resistance levels accompanied by an acceleration in price. Over the last 3 years momentum (as measured by our momentum oscillator MACD) was slowly gaining ground where it finally broke above the zero line (in early 2014) indicating for the first time in a long time, positive momentum.
The recent strength of US Steel is also reflected in our Relative Strength chart below, which compares the stock with the S&P 500. A rising ratio indicates that US Steel is outperforming (up more, down less) the S&P 500. The recent completion of the rounding bottom formation is also reflected in the relative price below, a sign that further outperformance lies ahead.
Finding a bottom is not an easy task but not impossible either. Remember that you’re not trying to “bottom pick” a stock. In other words, you’re not trying to buy at the absolute lowest price and hold on, as shares move higher (which is a recipe for losses). Instead, you want to buy after the stock bottoms and then hold on as shares move higher.
Costas Pierides CFTe, MSTA
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