Larry’s note: Welcome to Trading with Larry Benedict, the brand new 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…
The average consumer doesn’t need a reminder about inflation.
Everywhere they look, prices are rising. Everything from food, shoes, and clothes to dishwashers, refrigerators, furniture, and energy has gone up.
However, it’s not only these basic products (and commodities) that keep going up…
For example, we checked out aluminum producer Alcoa Corp (AA) earlier this month. In the short time since I wrote about it, Alcoa has burst another 20% higher…
And gold producer Newmont Corporation (NEM) – which we checked out on February 9 – has also risen around 8%.
As the two biggest elements of the SPDR S&P Metals and Mining ETF (XME), the rally in Alcoa and Newmont has caused XME to recently break out of its range.
Today I want to revisit XME because this latest move could be significant…
When we checked in on XME back on December 6 (red arrow on the chart below), it was stuck in its range. The 50-day moving average (MA – blue dashed line) was running almost right over the top of the trading range’s median line (horizontal red line).
(Remember: the blue horizontal lines show the upper and lower levels of the trading range. And the median represents the red line).
Take a look at this daily chart of XME…
SPDR S&P Metals and Mining ETF (XME) – Daily
At the time, XME was right near testing support…
The Relative Strength Index (RSI – the bottom half of the chart) was also touching the lower grey horizontal line, indicating XME as oversold.
After forming a ‘V,’ the RSI rose right across its channel near the overbought level (upper grey horizontal line). This coincided with XME rallying to the top of its trading range too.
On the chart, XME ran into resistance (upper green line) before rolling over and falling sharply. The pattern repeated after trading at the bottom of the range.
After forming another ‘V,’ the RSI rallied right up to the overbought level. However, this time XME burst through resistance (upper green line) and stayed there. That’s the first time this has happened since XME began range trading in May 2021.
As we’ve discussed before, breaking out of a long-held level (this time resistance) can often be the beginning of a major move… And that’s why this chart looks promising.
To give some more context, let’s take a look at a weekly chart of XME…
SPDR S&P Metals and Mining ETF (XME) – Weekly
In the weekly chart, you can see XME’s two major phases. The strong rally from the March 2020 lows (around $14) to May 2021 ($47), when XME more than tripled.
A key characteristic of this move is the divergence of our two moving averages…
After crossing over, the 10-week MA (red dashed line) moved further away (and higher) from the 50-week MA (blue dashed line).
As XME transitioned into its second phase (the sideways pattern), the two MAs began to converge back together. Last month, they almost touched.
If XME transitions into a new third phase (an uptrend), I’ll be looking for two key things…
First, we’ll need to see the 10-week MA start to move further away (and higher) than the 50-week MA.
Second, XME will need to stay above the upper green line, which means that the (former) resistance level will turn into support.
To be clear, it’s still very early in this recent move. There’s a possibility that XME could fizzle and fall back into its old range.
But whenever you see a stock price break out of a long-term pattern (like XME), it always gets my attention because it shows me that there’s the potential of entering a really profitable trade.
Editor, Trading With Larry Benedict
What are your predictions for XME?
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