New Uptrends developing in Materials?
In todays issue:
- New additions to our watchlist
- Stop Loss Exit
- Update on active trades
What's on our Watchlist?
The above table provides a summary of markets that are currently on our watchlist. Markets shown in red have been removed from our watchlist and the markets shown in green are new additions to our watchlist this week.
As per our trading rule #2 at the end of each trading day we scan our market portfolio to identify markets that are approach our buy criteria and add them to our watchlist.
It's encouraging to see our watchlist expanding over the past few weeks as our watchlist was more or less empty for the last half of 2022. Hopefully that’s an encouraging sign and there will be significantly more profitable trading opportunities in 2023. As a rules-based trader we don’t try and predict what the markets is going to do we simply systematically execute our trading rules.
It is especially hard to execute our rules after being in a bear market for the past twelve months and all the talking heads on tv are telling us there is a recession coming and we can expect the bear market to continue. Nobody knows what the future will bring. We just need to put our head down and take the signals our trading system generates.
One market, sugar, was removed from our watchlist this week.
And this week our trading strategy has presented us with possible trade set-ups in the Gold Miners, the materials index, in China and in Copper. Let's take a quick look at the charts for these 4 new entries to our watchlist.
Added to Watchlist
In last weeks video we walked through how our trading strategy got us into Gold bullion. That trade is profitable as we will discuss later and the strength in the gold market continues with the Gold Miners ETF joining our watchlist. This ETF includes some of the biggest gold mining companies include Newmont, Barrick and Franco-Nevada.
You can see on the above chart that XGD has developed a nice round bottom and has start to trend up. We added to our watchlist because it closed above the 200 DMA average. The 200 DMA is shown by the blue line on the chart. You can see that the 50 DMA, which is shown by the red line has not yet crossed the 200 DMA to form a bullish golden cross.
The purple dashed line on the chart shows the 6 month high of $19.10. For some traders a break of the 6 month high would the trigger to enter this trade. This trigger could be hit in the next week.
Given the strength in gold, the gold miners and copper which we will discuss in a bit, it is not it is not surprising to see the XMA capped materials ETF join our watch list.
The above chart looks very similar to the gold miner chart we just looked at. Like XGD,XMA has closed above the 200 DMA but unlike XGD the 50 DMA average has just crossed the 200 DMA average a formed a bullish golden cross. For some traders the would be the trigger to enter the trade but we are waiting to see if XMA can break through some upcoming resistance before we enter the trade. You can see that the price is quickly approaching the 6 month high of $20.01 which is represented by the purple line on the chart. Even if the price does break through this resistance level there are higher resistance levels at $21.44 and $23.11 that could act as resistance but could also be suitable entry points if the price breaks through those levels.
China has been in the news over the past couple of weeks as it aggressively lifts many of the Covid lookdowns and restrictions that have been in place. We don’t trade based news events but in this case the price action of the ZCH China stock market index ETF closely aligns with what’s happening in the real world.
In the above chart you can see that ZCH has closed above the 200 DMA. We will wait to see if the 50 DMA crosses the 200 DMA and if the price can clear the previous resistance level of $17.67. If that occurs our trading strategy entry criteria may be triggered.
The last market that was added to our watchlist this week was copper. As you can see from the above chart the price action for the COPX ETF is very similar to the previous charts we have reviewed. The ETF broke above the 200 DMA and the 50 DMA recently cross above the 200 DMA. Depending on the entry rules for their trading strategies some traders may have entered the copper trade based on the breakout above these two indicators. Our trading rules require that that we wait for a breakout above a key resistance level before entering the trade. You can see from the purple line that copper is approaching a 6 month high of $40.42. We will wait and see if our entry signal is triggered.
Stop Loss Exit- Sugar
Our Trading Strategy did not generate any new entry signals this week but our stop loss exit was hit on an active trade in sugar.
We originally entered the trade when there was a breakout above a previous key resistance area. Our trading rule # 3 states that we will enter the trade if there is a follow through on the breakout . You can see on the chart that there was a continuation of the breakout and we entered the trade at $9.74 which is highlighted buy the blue box on the chart.
Our Trading rule #4 states that we must know where we will get out of the trade if we are wrong and the upward trend does not continue. As soon as we entered the trade we placed $9.22 stop loss to protect our trading capital.
Sure enough as soon as we entered the trade the trend reversed and we were stopped out of the trade. No problem, we expect to be stopped out on over 50% of trades. We now have freed up capital to hunt for more profitable positions.
As you can see from the above table after being stopped out of our position in sugar we are left with 5 active positions. The majority of these trades are in the commodity sector. We also have one emerging market position and one position in health care.
We are currently about 50% invested.
When we are out of the market we park our money in a money market ETF or mutual fund.
Our trading strategy currently has a 35% success rate which is right on target.
Please let us know if you have any questions or comments.
Good luck and good trading!
We are not suggesting that you should purchase the securities that we highlight in this blog but rather see the steps, and the thought process, we go through to remove emotions from the trading process and systematically implement our trading rules.
It is our belief that each trader should develop their own trading strategy that fits their personality and with rules they understand and can systematically execute. If you are interested in building a personalized Trading Strategy please Download Our Free eBook "How to Build a Systematic, Rules-Based, Trading Strategy" and get started trading your way to financial freedom!