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Newmont Mining: Relative buy opportunity

February 18, 2013

18 February

Here is a sector pair chart that I regularly view:

Morgan Stanley Consumer Index (CMR) v Morgan Stanley Commodity Related Equity Index (CRX)

Cmrcrx_180213

  • The 40 week Bollinger Bands are their tightest for three years, with the ratio having traded sideways since June 2012
  • The 40 week moving average trends up
  • I am watching for an upside breakout, in the direction of the moving average, as per my entry criteria

ETFs for this trade set up in a the same way (IYK & XLP on the long side, XME & EWZ on the short side).

If the commodity sector breaks down on relative strength with good commonality, this trade is worth looking at. One slight concern, and they only form a small part of the commodity sector, is that gold stocks are oversold on relative strength.

I have shown recently how gold stocks are nearing oversold on breadth. They continue to fall to a long term oversold level but are not there yet. One relative chart sets up now with a trade though.

Newmont Mining (NEM) v SPDR S&P500 Index (SPY)

Nemspy_weekly_180213

  • A weekly RSI divergence is in place within this trough (vs. the January low) and across troughs (vs. the May 2012 low)
  • MACD divergence is in place against the May and August 2012 lows

Daily chart

Nemspy_daily_180213

  • The ratio has halved since November 2011 (red arrow)
  • A divergence formed in January
  • Another divergence (there is a fractional new relative low) has formed, this time above 30, meeting my RSI divergence criteria

Position entry

As stated on my methods page, the position is entered on an end of week close for the RSI (on the weekly chart) above the intervening high. That is an RSI of 32.6 from 08 February. The stop loss was stated in the methods as a move back into oversold for the RSI, but as this doesn’t define a level for the trade itself. I think it is better to set the stop loss as a new low for the ratio.

 

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