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September 17, 2014

Trading Cliffs Natural Resources with TrendBands

Back in early 2013 I purchased some shares in Cliffs Natural Resources (CLF) with the expectation that the natural resource sector was ready to come out of a slump lasting two and a half years. Within a month, Cliffs disappointed on earnings and slashed their dividend, causing the shares to drop by a third and stopping me out of the position.

Had TrendBands already been in my tool set, that long attempt not only would have been avoided, but I likely would have been short the shares from much earlier. Have a look:

After a failed rally, CLF could have been shorted in the third quarter of 2011 in the mid-$70s. A two year slide which kept price below the UpperBand would have finally ended in the mid-$20s.

The path to that victory was not for the weak-minded. Notice the counter-trend rally in the fourth quarter of 2013. After watching your short gain $30, the entire gain was erased by a 60% rally over four months. However, price never closed above the UpperBand and so a closing signal did not occur. A trader may have been disgusted by that bounce, but stoicism won the day.

Trading Cliffs with TrendBands would not be all roses, however. A long-term bullish bias would have likely flipped a trader long on the same UpperBand violation that closed the short.

However, the TrendBand stop kept a trader out of further trouble, as well as a deeper loss at the 2013 low. The next close above the UpperBand will present another opportunity to go long. There is, of course, no assurance the next signal will end profitably. I have said that this system will generate many more small losses than large wins. The key to success here is to keep initial positions small and have a strategy for building size as the trade develops the expected trend.


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