After trading in a tight range for most of 2021, the metals and mining sector got off to a flying start in 2022.

In late January, the SPDR S&P Metals and Mining ETF (XME) skyrocketed. By the time it peaked in late April, XME had rallied almost 70%.

It was trading at its highest level in over a decade.

However, XME soon reversed sharply and gave up a big chunk of those gains.

When we last checked XME on June 9 (red arrow on the chart), it was rallying off short-term support and showing promising signs of a long-term rally.

Today, I’m going to see how that move panned out and what we can expect from here.

Check out XME’s chart…

SPDR S&P Metals and Mining ETF (XME)

Source: eSignal

Our two moving averages (MA) show XME’s dramatic transition in early 2022.

After trading almost flat since 2021, the 50-day MA (blue line) started trending higher in mid-February.

The 10-day MA (red line) burst above the 50-day MA, showing the strength of XME’s move as it accelerated higher.

But there was a warning of a potential change in direction…

While XME made higher highs throughout the rally, the Relative Strength Index (RSI) made lower highs.

And the warning was right.

In late April, the RSI reversed sharply down through support (green line) and XME fell heavily. This led the 10-day MA to break below the 50-day MA (a bearish signal).

Eventually, that selling pressure faded out as the RSI went into oversold territory (lower grey dashed line).

Take another look at the chart…

SPDR S&P Metals and Mining ETF (XME)

Source: eSignal

As the RSI formed a ‘V’ and began to track higher, XME found short-term support from which it rallied in May.

On June 9, the RSI cautiously broke back through resistance (red circle). For that rally to take hold, the RSI needed to stay in the upper half of its range.

But the RSI reversed again, leading XME’s emerging uptrend to collapse and sending it lower.

Now, the RSI is bouncing along the bottom of its range and XME is trading back around its long-term support (orange line).

So, what can we expect from here? Well, XME’s previous patterns provide a strong clue.

Previously, whenever the RSI formed a ‘V’ on or near oversold territory, we saw XME bounce (numbers one through six at the bottom of the chart).

Over the coming week, XME will potentially retest long-term support. But what happens with the RSI is key.

If the RSI again forms a ‘V’ from oversold territory (becoming number ‘7’) and XME holds support, then XME could bounce and provide a possible setup for a long trade.

However, we must be careful.

Instead, a break below support – with the RSI stuck in the lower half of its band – could move XME another leg down.

Remember, when volatility is high, a stock can quickly reverse.

So, if we get the trade setup right, we need to be just as quick to capture any potential profits.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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