SLX Resting At Key Support

02/10/10 08:50:04 AM

by Donald W. Pendergast, Jr.

One of the strongest relative strength exchange traded funds over the past year has been the Market Vectors Steel Index ETF. It's stumbled lately, but it may be poised to retrace a portion of those recent losses.

Security: SLX
Position: N/A

The Market Vectors Steel Index exchange traded fund (SLX) has had quite a run since it began to emerge from a very pronounced double-bottom pattern early in 2009, more than tripling in value by the time of its recent high, made in January 2010. In fact, this exchange traded fund (ETF) still has one of the best relative strength rankings of all 45 ETFs I regularly track, even though it's in the midst of a proportional pullback to major support. Here's a quick look at SLX's weekly chart (Figure 1), which may help us get a better fix on its chances for a rebound along with the rest of the broad US market.

FIGURE 1: SLX, WEEKLY. Strong relative strength stocks and ETFs tend to remain strong; if the broad US markets cooperate and provide a relief rally, SLX should easily make it to $60 on the next weekly swing.

Graphic provided by: MetaStock.

Graphic provided by: Rahul Mohindar (RMO) oscillator from MetaStock v.1.

Imagine if you could find an investment that could regularly triple in value every 12 months, like SLX has just done. While that isn't very likely, the fact is that stocks and ETFs with strong comparative relative strength tend to remain strong for a given length of time, thus opening up the possibility of timing a pullback reentry at key support. SLX definitely qualifies as having megastrength, and this new pullback toward both major exponential moving average (EMA) and Fibonacci retracement support levels suggests that crafty traders may want to monitor this tradable for a long swing trade entry over the next few weeks. Currently, SLX sits right on top of its 50-week EMA (green line), having also retraced approximately 50% of its July 2009 to January 2010 trend thrust and not quite 38% of the extraordinary long February 2009 to January 2010 uptrend. Money flow (depicted by the 34-week Chaikin money flow histogram (CMF)(34) at the bottom of the chart) is still well above its zero line, as is the Rahul Mohindar oscillator (RMO) trend momentum histogram (see top of chart for this indicator). The only real fly in the ointment is the new RMO swing trade sell signal (red oval on chart), one that might be suspect, given all of the other nominally bullish technicals just discussed. Given that the broad markets may be on track for a modest bounce over the next week or two (see my most recent Traders.com Advantage article for more details), this could be an ETF to watch for a possible quick daily based long swing setup.

Any oscillator could help you time a potential long entry, as long as it tends to fairly emulate the general cyclical ebbs and flows in SLX; one of the better ones is the stochRSI (10) oscillator, and using it is no more complicated than watching for lower and upper signal line crossovers to complete before taking an appropriate position at the next session's open. If either the 50-week EMA and/or Fib confluence area holds on a daily retest of support, going long on a daily stochRSI crossover might be just the ticket for a short-term swing trade entry. Trailing such an entry with a three-bar trail of the daily lows may help you lock in some profits before overhead resistance begins to impede upward progress.

All in all, this setup might be able to manage a run back toward $60, maybe a bit higher, as long as the broad market decides to go along for the ride. One way or another, the market will have the final say; all we can do is read the technical clues that unfold with each new daily or weekly bar. There is the possibility (and a high probability) of a powerful new downtrend in the weeks and months ahead, but a significant bounce higher here is also likely — before the downtrend really gets going. Stay sharp and keep a close eye on the charts, as the first quarter of 2010 could end up being rather exciting, depending on which side of the market you happen to be on.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
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Phone # for sales:	904-239-9564
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