With Seinfeld on my mind, who could love Coal and Steel stocks right now? From April 2011, as measured by the SPDR S&P Metals & Mining ETF (XME), these stocks plummeted 50% through June 26. Analysts hate the fundamentals as China has stalled with continuing hard landing fears, costs are soaring for coal and steel companies as they continue to cut production, and inventories are remaining elevated. They are horrible, twisted investments. But this is exactly why we look to technical indicators along with fundamentals to make our investment decisions.
The chart to the right shows the XME ETF price in the top panel and the RSI, a momentum indicator, in the bottom panel over the last year. There are many things to love about this chart if you are a technician: The first thing I see is the bullish divergence between price and the RSI marked by the two red lines. It is a bullish divergence because the price fell further but the momentum indicator did not make a new low, which signals to me exhaustion from sellers.
The second thing to notice is the breakout on the RSI and price marked by the green lines. Both made a new high together after months of consolidation.
The third point is the failed breakdown from the double bottom. The price chart made a low in October 2011, and the price broke below that level last week. The bullish signals I mentioned came after the price moved back above the 2011 bottom, and has set a nice bear trap.
Last but not least, the price has moved back above the 50 day MA – the light blue line in the top chart — which is a nice confirmation for the short term trend.
There are other things on this chart that give pause to a longer term investor, including the down sloping 200 day MA (the pink line in the top chart). For this reason we have only made an investment in this area for our most aggressive clients; with further improvement and growing confidence that the U.S. will avoid a recession, this might be a good opportunity for the second half of 2012.