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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
This year, we’ve been closely following the SPDR S&P Metals and Mining ETF (XME).
It’s simply because at the same time the major indices were selling off heavily, XME went on an absolute tear.
Over a period of just two months, XME rallied by almost 70%.
But after topping out in April, XME reversed sharply.
As we discussed on April 25, divergence between XME’s stock price and the Relative Strength Index (RSI) led to a change in direction – down.
When we checked XME again a few weeks ago (red arrow on the chart), it had fallen 20% and was trying to form a base.
Since then, XME has made another big move.
So, today I’m going to discuss what to expect over the coming weeks.
Let’s check out XME’s chart…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
When we last looked at XME on May 9, the RSI had already broken below support (green line) and into the lower half of its range.
Also, the 10-day moving average (MA) recently crossed down over the 50-day MA – adding to the bearish sentiment.
For XME to rally from there, it had to hold support (upper orange line) at ‘A.’
The RSI also needed to break back up through resistance and into the upper half of its band.
As I wrote back then, if either scenario failed then XME would fall further.
A break below support, with the RSI remaining in the lower half of its band, could soon see XME test the $50 level.
And that’s exactly how it played out…
After falling through support at ‘A,’ XME has been trying to form a base at ‘B’ (lower orange line) over the past weeks.
This recent pattern coincided with the RSI bouncing out of oversold territory (below the lower grey dashed line).
So, what am I expecting from here?
Well, let’s take another look at the chart…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
Right now, the RSI is tracking back toward the green line.
What happens next is crucial to XME’s future direction and any potential trades.
When XME fell through support at ‘A,’ it happened right after the RSI tried breaking up through resistance but failed (red circle).
And as the RSI rebounded lower off the green line, XME’s share price followed it lower.
I’ll be watching for a repeat of this previous pattern.
Meaning that if the RSI rebounds lower off the green line, then I’ll be closely watching the current support level at ‘B.’
A break below that, with the RSI moving lower, could be a potential setup for a short trade.
But there’s more than one potential trade on the table…
When the RSI broke back above resistance in early February, it preceded XME’s giant rally.
If this pattern repeats, then XME could bounce strongly now that it has fallen around 30% from its April peak.
Either way, the key is to keep a close eye on the RSI…
XME’s future direction and any potential trade will be determined by whether or not the RSI breaks up through resistance.
Just remember to take your profits as soon as you see them…
Because with this year’s huge volatility, what looks like a winner today could quickly evaporate.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
I always appreciate it when people write in their thoughts. Here are some recent ones I’ve received…
Hello Larry,
Today I sold 10 contracts of the SPX call option when it was high for a $1,173 gain and sold the SPX put option early for a gain. With the SPX bouncing around, I jumped to capture that profit.
Too bad I didn’t let it expire. But I was happy to end with a $2,597 gain! I also bought two Apple contracts at $5.40, and I’m up $254 on that.
Thank you for these great trades from The S&P Trader!
– Mark A.
Hello Mr. Benedict,
Excellent lesson. Although I’ve read this essay before, I learn something new every time I read it. I really like your trading style. Thanks for writing.
– Xiping M.
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