These miners have been repelled by a previous support line from last year, after a kiss of death that I noticed last week:
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XME mining ETF: Support becomes resistance
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Tag Archives: mining stocks
Gold stocks
Nice entry with a clear stop for a short on GDX. Might have a channel forming off the highs:
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XME still mashed up against trendline
The miners have been among the leaders since the bottom a year ago, with everyone seemingly sure that hyperinflation is right around the corner. The thing about commodities is that when they break an uptrend, they can fall hard and never look back (witness oil’s drop from $147 to $35 in six months).
If XME is able to vault over this trendline and hold its ground, it will be bad news for the bears. Coming off extreme sentiment and a hard break, this is a very defensible short position with a tight stop.
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The kiss of death
A lot of charts are showing this pattern right now, where prices have broken through a longstanding support line then rallied back to touch it. Often this marks the last time prices see those levels. Here is XME, a large diversified mining stock ETF:
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Some sector winners and losers so far
The winners are those groups that have fallen the least since mid-January, somewhat adjusted for their potential to decline. I view these as the least prone to violent snap-back rally right now, so this is where I am adding, conservatively, to my short portfolio:
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Losers
Materials are among the big losers so far. Commodities have a tendency to fall hard right from the peak and keep crashing for months. I’d like to short here, but will wait for a better entry (which may never come).
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It is also worth noting that among the world’s stock markets, the US has held up pretty well so far, along with Japan, and believe it or not, Russia. The worst markets, besides Greece (which has already given up the majority of its 2009 gains) are the “emerging markets.”
Key to chart below:
Green: Japan; Purple: Russia; Dark blue: S&P500; Orange: India; Light Green: various emerging markets; Light blue: Europe; Brown: Brazil; Red: China (Shanghai-listed stocks)
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I suspect I’m going to be shorting Russia soon. It was among the very worst in 2008.
Keep your eye on the bouncing commodities ball
Here’s a five day chart of my favorite commodities stock shorts:
Click for sharper view. Source: Yahoo! Finance.
I nailed the commodities short at the peak in June, and sold a lot of my puts (GLD, GDX, TCK, NUE, X…) earlier this week as the sector made what may be the first of multiple panic bottoms in a bear market. I like shorting with longer-term puts, so I didn’t close all of my positions, but I built up a bit of cash. Lots of that went into retail and REIT shorts earlier this week, but some of it is waiting for this commodity bounce to get overextended.
This group fell 30-40% over the last ten to twelve weeks, so if this was indeed a meaningful way point, it could take up to eight weeks and a 25% rise for the countervailing bout of hope to play out. If the broader market is on the verge of a strong downdraft to beneath the July and March lows, which seems likely to me, commodities could get swept up in any waterfall and resume their decline sooner rather than later. This might not even be much of a bounce at all if broader market sentiment deteriorates quickly. Crashes do arise from oversold conditions – just ask Lehman shareholders.
The commodities markets are exhibiting a bit of negative correlation with the dollar, so I am also a bit short-term bearish on the currency. Any significant retracement would be another opportunity to get out of Euros, Pounds, Aussies, Loonies or precious metals (or short them again).
