It wasn't a bad start to the year until the pullback this week. Once we got a follow-through day on Jan. 6, our first step was to identify stocks with strong relative strength. Metal and mining stocks stood out in that regard. Here's how we made profits in XME stock and kept our trade positive.
Metal And Mining Stocks Build Relative Strength
At the start of December, of our six industry groups in the metal and mining stocks sector, only two were in the top half of our 197 industry groups: steel producers and metal processing and fabrication. The start of December was also a near-term top (1) in the SPDR Metals & Mining ETF.
But as XME stock corrected, a funny thing happened. All six metal and mining stock groups quickly found themselves in the top half of the industry groups by the start of the year. On the day before the follow-through day, you could see all the moving averages bunched together (2) and the relative strength line was near its December peak. Even though XME stock was 10% lower at the time. How does that happen? XME stock corrected but it was holding up better than the S&P 500. That put the metal and mining stock ETF firmly on our radar.
Buying On The Follow-through Day
When a follow-through day happens, we want to take a shot on stocks as long as the setups are there. For XME stock, it was.
The metal and mining ETF burst above its moving average lines, its relative strength line flew to recent highs well before the price and volume on XME stock showed increased buying interest (3). With plenty of positives in place, it joined SwingTrader that day at 52.49.
The setups were more plentiful on this follow-through day. That indicated a reason to be more optimistic. Especially since bounces after bear market years can be very powerful. Plus, by the end of the day the six metal and mining stock groups were all in the top 40 out of the 197 groups.
Despite the reasons for optimism, we still approached the trade like many in 2022 and before. We looked for opportunities to take profits into strength.
Locking In Profits
Our first chance came the next trading day when we had a 2.5% gain from our entry in XME stock (4) so we took a third of the position off. The downside reversal that day didn't look good as a second day. But locking in some profits made it easier to hold the rest since it reduced our risk.
XME stock recovered from the reversal and we took another third off when we reached a 5% gain from our entry (5). It continued higher and took a brief pause (6). Though extended, XME stock didn't offer much worrisome action. Getting extended was its only real sin.
But market indexes were also facing resistance levels and when they reversed, a lot of stocks and sectors reversed too (7). The profit taking into strength meant that we didn't take as much of a beating on the bearish reversal.
Still, we exited our final position because we haven't been willing to give trades much room to turn on us. In this case we had a big outside day, closing near the lows, undercutting lows of the past couple days and volume spiking as well (7). It was enough to prompt our exit. While the weakness might be short-lived, we still came away with a 4% gain for the entire trade in just over a week's time.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
