Are Metals and Mining Losing their Luster?

Are Metals and Mining Losing their Luster?

March 8, 2017 Off By Chuck

The metals and mining sector ETF, XME, had been in a severe downtrend losing more than 70% from Sept 2014 to Jan 2016, where it found a bottom. It quickly reversed not giving those waiting for a pullback a chance to enter and completely miss the train. It rose more than 100% before it took even the slightest breather. That’s how strong bull markets work, once the train leaves the station and the bears are forced to cover their shorts and if you want to participate you are forced to hold your nose and Buy, Buy, Buy.

As you can see in the chart below, XME rose more than 150% before the negative momentum divergences and bearish rising wedge pattern took hold. The pattern if it were to play out, projected to a correction of some 30% lower.  That could have created significant pain to position holders depending upon their entry price. But at least they were warned of the pullback probability allowing them a chance to insure they had an exit plan.

From that point and as you can see in the follow on chart below, price broke down from the wedge pattern and horizontal support, but only fell 18% before finding support and then consolidating sideways for 3 months. 18% is much more palatable of a pullback to live through than the 30% target. This is a great example of how “projected” targets (whether they are to the upside or down) are just that, “projected”. Price does not have to ever meet the projected level and even if it does, does not have to stop. As such targets are best used to help manage position risk.

With that background we fast forward to chart that includes data through today.  We see XME broke to the upside out of that 3-month consolidation and extended its gains. Maxing out at a healthy 210% total rise from the Jan 2016 bottom. In spite of that excellent performance, all is not well with XME. Once again it has formed a secon  d and much larger (outlined in red) bearish rising wedge during a time when divergence is prominent in the upper pane of price momentum. I emphasize the importance of patter recognition for this exact reason, they repeat. But results out of similar patterns don’t always repeat, XME holders are currently sitting at a crossroads. Having broken down through the bottom side of the wedge, a breakdown below the horizontal support is warning of a much bigger pullback. What I am wondering is if it will be muted like what occurred in the prior (blue wedge) example above or will this one meet (or possibly exceed) its “projected” $24-$24.5 target, some 30+% below its February top?