When the broader market was tanking at the start of last year, one sector went on an absolute tear…
From late January to mid-April, the SPDR S&P Metals and Mining ETF (XME) rocketed higher, gaining a massive 67%.
However, after such a strong rally, XME’s fortunes reversed… By early July, XME had given back all its gains for the year and was fighting to hold long-term support.
After a promising rally in August also reversed, XME again re-tested and held support in September.
When we looked at XME back in October (red arrow in the chart), it was in the early stages of another upward move.
XME went on to rally from there to its highest level since June 2022. So today, I’m going to see what’s in store for this volatile sector…
Trading Off Momentum
The chart of XME below shows its huge rally in early 2022…
The 10-day moving average (MA – red line) burst above the 50-day MA (blue line) nearly at a right angle.
And the Relative Strength Index (RSI) rallied strongly from oversold territory (near lower grey dashed line) up through resistance (green line) and into the upper half of its range. Take a look…
SPDR S&P Metals and Mining ETF (XME)
Source: e-Signal
However, a common reversal pattern warned of a change of direction…
While XME was making higher highs (upper red line), the RSI was making lower highs (lower red line) out of overbought territory (upper grey dashed line).
When buying momentum starts tracking lower like this, then eventually the stock price will roll over too.
And that is what we saw…
With the RSI then dropping below support (green line), XME’s fall accelerated. After a brief counter-rally in May through June, XME then fell further before retesting and holding long-term support.
From there, the RSI shows a repeating pattern.
Take another look…
SPDR S&P Metals and Mining ETF (XME)
Source: e-Signal
In both July and September, XME rallied when the RSI formed a ‘V’ and rallied out of oversold territory.
In September, the RSI tracked right across its channel, and XME hit a fresh peak. But unlike that rally, the one in October took longer to establish its momentum…
Once the RSI was able to gain traction in the upper half of its range, XME then started to rally higher. And it made a higher high than its August peak.
After a brief pullback, the RSI again burst up through resistance earlier this year, sending XME to another higher high.
So what am I looking for next?
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A Potential Reversal?
Earlier this month, the 10-day MA bullishly broke back above the 50-day MA. It has continued to accelerate higher.
Since late November, the 50-day MA has also been trending higher.
For this rally to continue, we’ll want to see both MAs continue to track higher, and the 10-day MA must continue to move further above the 50-day MA.
The other technical indicator I’ll be watching is the RSI…
XME’s recent acceleration higher has put the RSI right into overbought territory. The RSI and XME both reversed off this point, but this past week both have slowly tracked higher.
If the RSI reverses again and tracks back toward support, then XME could be due for a quick pullback… That could provide nimble traders with a potential setup for a quick short trade.
But for XME’s longer-term rally to hold, we’ll want to see the RSI’s support level hold… and the RSI remain to in the upper half of its band.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
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