It’s been a little over four months since we wrote about Steel Dynamics. On January 16th, the stock was hovering around $33 a share. The price was down 37% from its May 2018 peak at $52.10. Yet, despite the reduced price, we thought investors would be better off avoiding the name.
Our bearish opinion was not rooted in some deep understanding about how the COVID-19 pandemic was going to develop. It also had nothing to do with the economics of the steel industry the company operates in. Instead, it was based entirely on the chart below.
The stock’s 4-hour chart revealed a five-wave impulse, labeled 1-2-3-4-5, followed by a simple A-B-C zigzag correction. These two structures formed a complete Elliott Wave cycle. According to the theory, the price’s next move was supposed to be in the direction of the impulsive sequence.
Steel Dynamics Stock Looked Vulnerable Even Before COVID-19
The anticipated decline was supposed to breach the bottom of wave 5 at $25. With that in mind we concluded Steel Dynamics could tumble 25% or maybe even more. Based on numerous fundamental measures the stock was a bargain. Unfortunately, the chart above suggested it could still get a lot cheaper. Then this happened:
STLD didn’t drop by 25%. It dropped by almost 55%. The stock started plunging almost right away. On March 18th, it fell to $14.98. Investors holding the shares since May 2018 experienced a 71.2% loss in less than two years.
However, despite the stock’s collapse, the underlying company isn’t going anywhere. Steel Dynamics is a profitable business, which is not overburdened with debt. As governments continue to ease lockdown restrictions and economies recover, it makes sense for STLD to rise, as well.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!