The other day it was noted in a previous post (see Dec. 5, 2010, www.etf-portfolios.com) that the SPDR S&P Metals & Mining ETF (XME) was approaching a zone of potential resistance and reversal in the area of its top parallel trend channel line, and 61.8% Fibonacci retracement level of the downtrend begun from its early July 2008 high. 

On Monday XME moved through the 61.8% level of $65.93 and hit $66.89, arguably right at the top channel line. Then, yesterday, Tuesday, we saw a key reversal day and Bearish Engulfing candlestick pattern emerge after gapping higher at the open. 

These bearish indications are confirmed by volume yesterday, which was above average and above the previous 10 trading days. Stochastics on the daily chart is in overbought territory and has crossed down. 

A further retracement at this point is likely, with a number of potential support areas below Tuesday’s close of $65.48. First, we have horizontal support at $62.89, which is very close to the 12 exponential moving average (ema), now at $63.12 (remember the moving average will move each day). Next is the 21ema, currently at $61.69, which will also be very close to the lower uptrend line defining the recent symmetrical triangle pattern. As time goes on the 21ema will converge towards this line. 

Fibonacci retracement measures have been drawn from three swing lows starting in late November to look for confluence with each other, as well as price levels mentioned above. Fibonacci Levels with no obvious confluence have been removed. 

You can see on the above chart the areas where at least two Fibonacci levels are pretty close. Three levels line up just below the horizontal support line of $62.89. Watch this zone closely as price approaches. By the time XME gets there this area may be strengthened by the bottom triangle line and 21ema.