Coming into the start of 2022, the metals and mining sector was trading in a narrow, rangebound pattern.
However, that all changed in January when the SPDR S&P Metals and Mining ETF (XME) broke higher and went on an absolute tear.
By the time XME peaked in April, it had risen around 70%. That put it at its highest level in over a decade.
But the rally didn’t last. XME reversed sharply soon after. By early July, it was trading right back down on its long-term support (the yearly low).
It tried to rally again but – as we saw last month (red arrow on the chart below) – XME had rolled over in August as momentum reversed.
From there, XME dropped further, retesting and holding support.
Now, the XME chart pattern is transitioning again. So today, we’ll see how things might play out from here.
A Chart of Three Parts
The 50-day moving average (MA – blue line) shows XME has had three distinct periods – labeled 1, 2, and 3 on the chart below.
Take a look…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
As we came into 2022, the first distinct period (1) exhibited a sideways pattern.
Then, the second distinct period (2) showed a rise and fall from January through July. Finally, XME transitioned from August onward to return to a sideways pattern again (3).
And the interaction between the 10-day MA (red line) and the 50-day MA reveals another takeaway…
During the massive rise toward 2, the 10-day MA broke strongly above the 50-day MA and accelerated higher. Then, as that rally reversed, the 10-day MA crossed back the other way.
Compare that to the action at 1 and 3. There, the two MAs crisscrossed multiple times throughout the sideways patterns.
The Relative Strength Index (RSI) in the bottom half of the chart also shows a couple of repeating patterns…
-
XME rallied when the RSI formed a ‘V’ and rose from oversold territory (lower grey dashed line). You can see the most recent example occurred last month.
-
XME reversed when the RSI formed an inverse ‘V’ from overbought territory (upper grey dashed line). This happened most recently when XME retraced from its August peak.
Let’s take another look at the XME chart…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
Today, I’m interested in the times when the RSI tracks in between these two extremes – that is, right along resistance (green line), as it’s doing now.
So what am I looking for around here?
Free Trading Resources
Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.
Trading Rangebound Markets
When the RSI went straight up through resistance – as it did in February and July – XME went on to enjoy a nice rally.
If the RSI again breaks higher – and gains traction in its upper band – then we can expect to see a similar pattern repeat. (But remember, we must be ready to take any profits when we see them.)
However, if the RSI temporarily breaks into this upper range but fails to gain traction, XME’s current up move will quickly lose momentum.
In both June and September, XME fell and traded all the way back down to long-term support as the RSI dropped back into its lower range.
So the price action – and any potential trades – hinges on which way the RSI breaks from here.
At first glance, a rangebound market like XME may seem to offer few trading opportunities…
However, an indicator like the RSI can help us find tradeable moves and countermoves even in a sideways trend.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In what other rangebound markets do you see trading opportunities?
Let us know your thoughts – and any questions you have – at [email protected].