Technical analysis is based on the belief that supply and demand dynamics drive stock prices. Often, we use charts as a visible display of the data. Although critics will dismiss the use of charts to dictate to future action, we often witness patterns that lend themselves to quick trades.
Consider Cliffs Natural Resources (CLF). CLF is a diversified mining company that mines for iron ore and coal in North America, South America, and Australia. Driven by swings in commodity prices, CLF exhibits repeatable patterns that allow astute traders to profit.
Over the past year, CLF has topped out beat $31 and $32 on four different occasions (blue boxes). After the rallies failed, the shares quickly retreated with $20 acting as a key support level (green line). On two occasions, the stock has bounced off this support and moved higher (blue arrows). Once, support failed and the prices dropped to annual lows (red arrow).
At today's close, CLF is sitting above the support level. The question we now ask is what the next few days hold. If CLF can successfully rally from this level, $20 would have acted as support for a third time and the price should move into the high-$20s. However, should prices fall over coming days we will look for lower prices with an interim price target of $14 (red box).
Given the proximity to support, traders could make a decision either way. Those feeling bullish should buy the shares here and use a tight-stop at $20. Those who are bearish should wait for a move below $20 before initiating a position. Having no position in this stock, I will be watching over the next few days to decide how best to trade a pending move.