Miners ETF Fails Critical Support Levels

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK (ETF Digest) -- This is another opportunity to preach my "know the holdings" sermon. Too often traders make an assumption about the mining industry that it's a subset of precious metals.

XME is a near perfect case in point. Understanding the holdings in XME will explain why it's failing support.

First off, XME is usually referred to as a "Mining ETF" when in fact, it's very name states Metals & Mining. What metals comprise of in this ETF makes a BIG difference. Let's go right to the holdings table.
 
SPDR S&P Metals & Mining (XME) is weighted in industrial metals.

 

Although the top holding is a platinum and palladium miner, these two metals are largely tied to the auto industry in the manufacturing of catalytic converters. Even if we look at platinum as a precious metal, gold has exceeded platinum in value. 

On the table above we see steel manufacturers are three of the top holdings and (not on the table) US Steel (X) is the ninth largest holding. Alcoa (AA) is the eighth.

With a lack of heavy construction, especially in infrastructure, steel has been weak. Also, in an effort to make automobiles lighter and more fuel efficient, parts formerly made of steel are now plastic, rubber and aluminum. Much of what we are calling "recovery" in the economy has been in services industries. Heavy industry hasn't seen much in the way of recovery yet.

Copper is often used as a gauge of economic strength. Slowing in China, the largest buyer of copper, caused copper to falter in February.

Performance wise, XME is a sea of red ink. Volatility of 2.37% on an unleveraged ETF is in the upper realms of risk.

Even with the post selloff and Greek bond default euphoria today, XME has a long row to hoe to recover from its breakdown. 

The first failure of the price was at the lower trend line. An ascending wedge pattern is usually expected to break to the down side. There are many ETFs in this configuration. XME was just the first to fail. As a factor of basic materials, this is not a good sign of economic growth.

Price also failed the 50-day moving average. This was so close the lower trend line that it should have acted as a double support level. Failing such a strong support level is very significant.

Finally, price broke the lower channel support. Had this been a simple piercing of the lower shadow of a single candle, it may have been a recoverable event. In this case, the price remained below the channel break for three days. It is very rare for a lower channel breach to have a v-shaped recovery.

Friday's monster green candle on non-existent volume brings XME only half way to the 50-day moving average resistance. Above that is the trend line stronger resistance which will require conviction volume to break through.

Today is like Christmas for the media spinmeisters. An actual decline of 60K jobs from last month got the bright green "beat" headline on a ridiculously low expectation. Unemployment of 8.3% is being treated like a victory bigger than the Japanese surrender of World War II. And of course, what could be more euphoric than Greece defaulting on its bondholders? I wonder if these bond holders are gathering for celebrations today as traders on the floor are toasting each other in victory.

A pop in XME may be a good selling opportunity.

Disclosure: At the time of writing, I have no position in XME.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.