Action:
The charts above are of SMN (Ultra short basic materials), MTL(Mechtel steel and coal).
As can be seen from MTL, this chart has been in an uptrend for a about an year. Conversely, SMN has been in a downtrend. MTL is at the lower end of its channel.
While this maybe a tempting opportunity for another "iteration" on MTL, there are a few bearish signals on the MTL chart.
1. In the last iteration, MTL failed to make significantly new highs.
2. While the price action has been making new highs, the MACD has been decreasing. This is a typical bearish divergence.
On the other hand, SMN which is 2 times short basic materials, is showing a bullish divergence.
Guess:
On the issue of whether MTL holds its channel, the choice is a difficult one. We are slightly biased towards a breakdown of the channel on MTL.
On an orthogonal issue, Marc Faber (one of the best economists in the world right now) noted in his latest interview that the commodities need to correct and are reaching bubble proportions. Other metal stocks like SID(we own some of this) are also showing a bearish divergence.
Accordingly, we would have a small position in metal stocks. We are looking to sell these stocks as soon as they hit any key technical levels, e.g their 50 moving averages.
4 comments:
I don't see the divergence in SID, it looks good so far, as long as the market sell off doesn't cause it to break down. Seems unlikely though given that it held up through Thurs and Fri last week. I could see it getting above at least 50 by the end of July unless there is some kind of breakdown given its current trajectory. The top of the channel looks to probably be about 60 if it takes about a month or so to get there. What do you think?
I own SID myself. The low from last week is significantly higher than the low from april, the MACDs are not. This is what I meant then. MACD divergences don't always workout - I hope this time they don't too.
SID needs to decisively break its 50dma. Also I don't like the upwards consolidation in SID after a megamove, 3 days back.
The intra day action on SID was extremely discouraging today. Huge sell bars.
MTL didnt do very well...waiting for it to go up a few more points and then I am selling. I will be happy just to break even
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