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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… |
I’m sure it’s been a rough start to the year for many investors.
We were barely into the beginning of the year when the major indices started to fall.
Add in some high-profile earnings misses – like Spotify, Netflix, and Meta Platforms (Facebook) – and clearly investors have become much more cautious in 2022.
After such heavy falls, several stock charts are sharing a similar pattern: a rally into the end of 2021 followed by the January selloff… And then the relief rally we’ve seen over the past week or two.
However, this bounce is starting to lose momentum.
While this pattern has become quite familiar, it doesn’t cover all stocks. Even when the market falls, you can always find an exception that rallies.
Today, I want to run through one stock doing just that… It’s the world’s largest gold producer, Newmont Corporation (NEM).
In fact, for much of the last year, it has shown almost no correlation with the broader market.
In the chart below, you can see that Newmont peaked in May 2021…
Newmont Corporation (NEM)
Source: eSignal
But after that, it was all downhill…
The long-term 50-day moving average (MA – blue line), fell steadily before finally bottoming out coming into December. All the while, the S&P 500 was rallying strongly.
After bottoming out, the 50-day MA has begun to move higher. Adding to the bullish signal is the short-term 10-day MA (red line). It crossed above the 50-day MA in mid-December and has remained there ever since.
For this uptrend to continue, Newmont will need to break above its January 20 high ($65.49), represented by the orange line.
The key to that lies with its momentum…
In the lower half of the chart is the Relative Strength Index (RSI). I have drawn our regular green line at the 50% level, which reflects support and resistance.
If you go back through the chart, you’ll notice some key patterns with the RSI. On the far left of the chart when Newmont was rallying to its May high, the RSI was in the upper half of its range (above the green line).
Then as the RSI went into overbought territory (above the upper grey line) and fell, declining momentum brought Newmont’s share price down.
As Newmont continued to fall all the way through October, the RSI remained mostly in the lower half of its range (below the green line). That’s what we expect to see when a stock is in a downwards trend.
Then from October to December, Newmont began to transition. After trading sideways, Newmont began its current rally around mid-December.
Again, we can see how this rally emerged by looking at the RSI. After breaking out of the lower half of its range in early December, the RSI has remained in the upper half since the current rally took place.
So, what am I looking for from here?
Let’s take another look at the chart…
Newmont Corporation (NEM)
Source: eSignal
For Newmont to keep rallying, the RSI needs to stay in the upper half of its range. We’ll also know that this rally will gain strength if the 10-day MA begins to accelerate away (higher) from the 50-day MA.
Both scenarios could provide a good setup for a long trade.
If the gold price continues to rally and momentum remains strong, we can expect to see Newmont rally into its fourth quarter (Q4) and 2021 earnings results on February 24.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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