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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… |
Consumers are all too aware of rising prices in things like food and gas.
But sectors like metals and mining have also seen strong inflation.
With supply unable to match soaring demand, the prices of aluminum, copper, and steel have gone through the roof.
When we last checked in on the SPDR S&P Metals and Mining ETF (XME) , we saw this supply/demand mismatch in action (red arrow on the chart below).
XME went on an absolute tear after breaking through resistance in February. From its January low to its recent high, XME rallied a whopping 67%.
But earlier this month, I wrote that there were emerging signals warning me about a coming change.
Those signals became stronger over the past couple of weeks. Today, I want to update you on what I see happening next.
Let’s look at the XME chart…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
You can see just how strong the recent rally has been.
Up until February, the 50-day moving average (MA – blue line) was trading almost flat.
Then, when the 10-day MA (red line) broke above the 50-day MA, the rally began. The strength of that rally is shown by the rate at which the 10-day MA accelerated above the 50-day MA.
When we last looked at XME, there were signs of growing divergence between its share price and the Relative Strength Index (RSI), shown by the orange lines.
Since then, this diverging pattern has become stronger.
Take another look…
SPDR S&P Metals and Mining ETF (XME)
Source: eSignal
XME went on to make a new high on April 18, while the RSI made a lower high.
This divergence is important.
Although a stock might make new highs, eventually that uptrend will reverse if momentum starts to wane. And that’s what I was looking for when we last checked XME.
After making that lower high, the RSI fell back on support (green line) – a key level.
So, how do I see things playing out from here?
Well, if the RSI holds support and stays in the upper half of its range, then the current down move could be a short one.
Don’t forget that momentum works both ways. For a down move to gain traction, the RSI needs to break into the lower half of its range.
If the RSI does break below the green line and stays there, then this current fall will be larger. This would provide an opportunity for a short trade.
I’m also watching our two MAs.
With XME trading lower off its recent high, the two MAs look to be converging. This often happens when a trend loses momentum.
If the 10-day MA breaks down over the 50-day MA – and the RSI moves into and stays in the lower half of its band – that’ll provide evidence that this emerging downtrend has further to go.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
What other sectors do you think inflation will affect?
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