The presence of flat 200 day moving averages throughout many of the US Stock Market Indices and sectors, combined with a few other factors, is causing me to maintain a neutral / bearish stance toward equities for the time being. Luckily, as a technician I can take advantage of opportunities in other non-correlated liquid assets.
That being said, the Global X Uranium ETF (URA) looks good on the long side for a number of reasons.
- The Uranium ETF (URA), despite being an equity ETF, has no correlation to the S&P 500 over the past month, quarter, and year. This is great given my view on equities at the moment.
- My structural downside price targets for the Uranium ETF have been met while momentum diverged positively on multiple timeframes, suggesting we may be due for some mean reversion.
- The risk/reward ratio is high and the risk is well defined.
Overall this backdrop has the characteristics I look for in this type of environment, and given the lack of interest / buzz around this particular space, I think a sharp rally can develop if price action continues to improve.
From a structural perspective, there have been few things worse than URA these past few years. It is down roughly 90% off of its 2011 highs and needs to reverse split occasionally just to remain trading. With that being said, my structural downside target at the 261.8% extension of the January – May 2015 rally was met this past August. More recently, the Uranium ETF retested the year-to-date lows, momentum diverged positively, and prices are now attempting a breakout above the accelerated downtrend line that’s been intact since May.
If this breakout holds, the next big hurdle is the trendline from the April 2012 lows near 15.50, but that’s still over 10% away from current levels.
Uranium ETF (URA) Weekly Chart
The daily chart for URA provides a closer look at the retest of the year-to-date lows with momentum diverging positively. After a few weeks of basing, prices have finally broken out above the prior low near 13.50, as well as the downtrend line from the October highs. If this breakout can hold, the first target seems obvious at the downtrend line from the August highs near 15.25, which corresponds nicely with the longer term downtrend line on the weekly chart. Above that, there is prior support near 17, which also represents the 38.2% retracement of the May-December decline and the area of the downward sloping 200 day moving average. That is the ultimate price target for the Uranium ETF if the rally continues to develop over the next few weeks and months.
Uranium ETF (URA) Daily Chart
It’s no secret that URA has been a serial underperformer versus the S&P 500 and many other asset classes, but the chart below shows a falling wedge developing in the ratio of URA/SPX over the past year, which could help turn that trend around in the short-term.
Momentum recently diverged positively as the ratio tested the lower trendline drawn from the February lows and is beginning to turn higher. The target in this ratio is up toward the downtrend line and prior highs near 8.0. and the risk is at the recent lows of 6.3.
I think the risk/reward is more attractive on an absolute basis, but I wanted to provide an additional viewpoint for those who like to approach the market from a market-neutral perspective.
Uraniam ETF (URA) / S&P 500 Ratio Performance Chart
The Bottom Line: The Uranium ETF has certainly been one of the worst performing sector ETFs in the world for years, but the weight of evidence suggests that this market may be due for some mean reversion. It may not be discussed as often as some of the more popular sector ETFs, or be as liquid, but as market participants we can still take advantage of the opportunities in this market as they present themselves.
From a risk management perspective I only want to be long this market above 13.50 on a closing basis, which represents the September lows. I ultimately think this breakout will continue to develop over the next few weeks and months, with prices testing the 38.2% retracement of the YTD decline and 200 day moving average near 17. With that being said, I do expect some resistance near 15.25-15.50. This rally will not occur in a straight line, but let’s take it one day at a time and see what the market does from here.
Overall, with a price target of 17, and a stop below 13.50, the risk/reward from current levels is roughly 6:1 and can reach much higher levels depending on where you choose to enter / exit this trade. Given the weight of evidence, I think we see a 20% rally in this market over the next few months.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.
This post originally appeared on SeeItMarket.com on 12/23/15.
The author has a long position in the mentioned securities (URA) at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
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