While the charge higher in stocks has boasted broad participation, not all sectors received an invite. Sure, the likes of technology and biotech have been basking in the bull’s glory, but some areas of the market are simply trying to stop declining.
The SPDR Metals & Mining (ETF) (NYSEARCA:XME), for example, is only now starting to carve out a bottom from which it hopes to stage a new advance.
This discrepancy in performance has always been a market dynamic and should be welcomed. In times like this where the broad market has galloped into the wild blue yonder, it’s nice to have some stocks that aren’t extremely overbought to structure trades around.
Plagued by persistent weakness in commodities the XME ETF has taken a deep dive into the abyss. And yet, despite its shoddy perfromance, the popular mining stock ETF is beginning to show some promising signs of bottoming.
Here are three tell-tale signs:
- Failed Breakdown. In late January XME slipped below a support level at $27 in what appeared to be a renewed downturn. But the bears fumbled. The breakdown attempt failed and XME has since staged a powerful 13% rally. Technical analysis is chock full of trading aphorisms and the one that comes to mind here is “from failed moves comes fast moves.” The squeeze is on for the bears and that’s helping to turn the short-term trend for XME.
- Momentum Divergence. Yet another early warning sign that the trend could be turning is momentum divergence. While the XME ETF was forming a lower pivot low during the previously mentioned breakdown attempt, the RSI was developing a higher pivot low. This positive momentum divergence suggests the downtrend is losing steam and adds further evidence to our case.
- Trendline Break. The recent rally in XME has been powerful enough to break the downtrend line that has defined the ETF for the past six months. At a minimum, the trendline breach was sufficient in turning the short-term trend more neutral.
XME Option Play
With the implied volatility in XME higher than most other areas of the market, it remains an attractive candidate for short option plays. In addition, the cheaper price tag lends itself nicely to a naked put play.
Sell the Mar $28.50 put for 50 cents or better. The max reward is limited to the initial credit received and will be captured if XME can remain above $28.50
By selling the put you obligate yourself to buy 100 shares of XME at $28.50. Those unwilling to buy shares can avoid assignment by simply buying back the put if it sits in the money prior to expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
