What I'm Waiting For To Buy Base Metals

Since we entered the second quarter of 2015, I've been very vocal about how I feel about the US Dollar up here and how I think we can benefit from the currency continuing to weaken since peaking a month ago. I like the beat up emerging markets mean reverting here and think that Energy and Energy related stocks and countries can benefit as well. But also within that theme, I believe the base metal complex can do well in that environment. To me, this all fits together.

We've been all over the Energy trade for a while (see here and here), so now I want to turn our attention to Base Metals. We look at Copper as a leading indicator and it's already up 12% since the January lows and as much as 20% at last months highs. I think the correction we've seen the past couple of weeks is just temporary and we head higher. So how do we want to take advantage of this? I like the Metals & Mining Sector.

Here is a daily candlestick chart of the S&P Metals & Mining ETF $XME. To me, this is the cleanest way to explain what's going on. It's very simple: We have a very clear downtrend line from last September's highs. This is where the recent collapse first got started after a huge rally over the previous year. So it makes sense to use this as our reference point:

As the price of this exchange traded fund tries to break out above this downtrend line, it is also approaching the apex of a symmetrical triangle since last month well-defined by two converging trendlines. We are looking for a simultaneous breakout above both of these to confirm that we are heading higher and that it deserves our involvement.

The catalyst to do this I believe is the bullish momentum divergence at last month's lows. Similar to what we saw in Crude Oil and Emerging Markets, momentum in the Base Metal complex put in a higher lows last month while prices made lower lows not seen since March of 2009. Does that month mean anything to you?

We want to be aggressive buyers of a breakout. This is not something we want to be involved with if we are below these trend lines. So this makes the risk/reward very much skewed in favor of the bulls here as the risk cannot be any more well-defined. Companies in this space include the Steel stocks like US Steel, AK Steel, Steel Dynamics and Reliance, but also names like Freeport-McMoRan, Hecla Mining and Royal Gold. This is a very diversified ETF with its largest holdings representing just over 4% of the fund. We like that.

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Tags: $XME $FCX $X $AKS $STLD $HL $RGLD $RS $HG_F $UUP $CNX $EEM $CL_F $USO $JJG