It’s no secret Russia has had a rough few years.
Between the crash in commodities, EU sanctions as a result of the Crimean Crisis and massive government spending, Russia has been mired by its worst recession in the post-Soviet era.
While the emerging market nation is facing challenges, it may also be presenting an opportunity for strategic investors.
Historically, it has been close to impossible for retail investors to access Russian markets, but with the rising popularity of ETFs, investors can now gain diversified exposure to Russia in a single product.
Today, we’ll take a technical trading eye to the Market Vectors Russia ETF (RSX) to see if now is a good time to take a position.
RSX gives investors exposure to publicly traded companies listed in Russia. It holds 49 positions across a variety of sectors.
The RSX reflects the Russian economy’s dependence on energy commodities as evidenced by the ETF’s almost 40% weight to the energy sector, which is more than double the next sector weight in the fund.
As oil bottomed at the beginning of 2016, so too did the RSX. The stock is now up about 40% from its low point at the very beginning of the year, and has reached new highs this month despite a strengthening dollar that has created a drag on oil prices, and thus the Russian economy.
Despite oil prices continuing to struggle, many of the non-energy related stocks in the RSX are doing well this year as many non-energy sectors of the Russian economy are doing alright which is contributing to the overall fund being up for the year.
To understand if now is a good time to take a position, let’s take a step back to look at the last time the RSX hit a bottom.
As you can see in the chart above, RSX took a sharp dive between 2008 and 2009. As soon as it hit it’s low, it began to climb rising to just under $44 a share at the top of the uptrend, a 75% rise.
This was followed by a correction and you can see a support line by drawing a trend line connecting the lows in late 2011, early 2012 and early 2014. As a reminder of our overview of support and resistance levels from last week, a support level is the price that a stock has difficulty falling past within a trading range, and the resistance level is the price that a stock has difficulty advancing past.
In the case of the RSX, you can see that our old support level became a new resistance level in 2015 after the stock price broke through the old support line.
Fast-forward to this month and we can see the start of a breakout above this line that is the new resistance level. This indicates the possibility of a new uptrend and an opportunity to get in early on the new uptrend.
Now, it’s safe to say that this week’s slight breach of our resistance line would be an aggressive entry point, however, it’s also safe to assume that there will be good entry points in the future as the trend continues.
Let’s talk about what this might look like.
Tests of new support and resistance levels give traders the sign to either add to their position or to take a position.
I’d recommend that investors watch for retesting of the new support level which would be a safer entry point if it occurs as it confirms the uptrend that we think is coming.
A retest would look something like this:
For a retest, you’ll want to look for the trend advancing upwards and then coming back down to hit our new support line. The price continuing upward after this makes for a much safer entry point as it confirms the support line and the uptrend, and it ensures that you’re still able to get in on this trend early. The arrow you’re seeing in the chart above represents what we project this trend may look like.
What we’ve discussed today is an aggressive entry and a more moderate entry, and last week we discussed a conservative entry into a trade. Let’s now take a quick look at an exit strategy.
Trend followers typically don’t necessarily try to determine price targets for trade exits. Instead they employ what’s called a trailing stop.
A trailing stop is a stop order that is set at a defined percentage away from a stock’s market price. For a long position, the stop would be set at a percentage below the current market price, and for a short position it would be set above the current price.
Trailing stops are designed to protect your gains by keeping a trade open to continue to profit as long as the price is moving in the right direction, and only stopping the trade if the price of the stock changes direction and hits your specified percentage.
The major benefit of a trailing stop is that it takes the emotion out of the sell decision which helps to protect your profits.
The trick is to set the stop at a percentage that is neither too tight—to avoid the trade being stopped before it’s had a chance run up—nor too wide which may result in leaving too much money on the table.
What’s difficult with a trailing stop is deciding at what percentage to set your stop to, or in other words, deciding what constitutes an acceptable loss. This may be a very different number for aggressive investors compared to conservative ones, and it’s up to you to decide what you’re comfortable with, whether 10, 15 or 25 percent.
You may want to wait for certain technical indicators before setting your stop percentage. For example, you might wait for a few weeks to watch the price trade between the new trading range looking for a breach of the range’s resistance level before setting your percentage. This would require some patience, but you’ll make a more informed decision on your stop percentage.
To sum things up with the RSX, it’s clear that it’s price has begun to breach a resistance line and is likely starting a new uptrend that may see it advance considerably. This breach is an aggressive entry point and more conservative investors may want to wait for a retest of the new support line.
If you do decide to get in on the uptrend now, watch for new breakout entry points to add to your position. If you’re going to hold off, watch for a safer entry point after a retest.
Considering that the Russian economy is still a somewhat risky bet which could cause the RSX to drop considerably, a trailing stop is a good play as it removes the emotion from closing the trade and will protect your profits.
I hope you’ve enjoyed these last few weeks of lessons on technical trading in our Sunday Editions. Next week we’ll be featuring a repost of an article written for Investiv Daily, a free newsletter that we offer that takes a more fundamental analysis approach.
Marketing Director, Investiv