Materials stocks rallied on Tuesday thanks to optimism about earnings in the sector, as well as a renewed bid in the broader stock market. Shares of agricultural and basic material company Monsanto Company (NYSE:MON) also traded marginally higher on the day. Although Monsanto stock couldn’t hold up the majority of the gains into the close, its currently tight technical pattern could soon release it into well-defined higher ground.
The broader us stock market has largely been rangebound since mid-December. But on Tuesday, the S&P 500 — as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — finally managed to break to fresh all-time highs. Arguably more important, with Tuesday’s rally, we once again saw sector or group rotation. And we hadn’t seen much of that for weeks as the stock market trotted sideways.
Tuesday’s leading group of stocks was the materials sector, represented by the Materials Select Sector SPDR (NYSEARCA:XLB) exchange-traded fund (ETF). The sector not only acted well in absolute terms, but in relative terms versus the S&P 500, it also managed to complete a breakout of a roughly nine-month sideways consolidation pattern.
When I see relative and absolute strength in a sector, I sit up and take notice.
Monsanto Stock Charts
On the multiyear weekly chart of MON, we see that in 2015 and 2016, the stock formed an important higher low versus its 2010 lows. This was followed over the past couple of weeks by a breakout attempt past diagonal resistance from the 2015 highs.
Last November, following the U.S. election, MON stock also bounced off its yellow 50-week simple moving average, which previously had acted as resistance since June 2015.
On the daily chart, we see that the higher lows from last November also coincided with a 50% retracement of the rally from March 2016 into June 2016. The high $90s thus served as important support for the stock, which has since rallied back toward levels last seen in September 2016.
Monsanto stock consolidated through much of December, and after a two-day bounce in early January, it has once again settled into a tight consolidation pattern. However, that’s taking place right under horizontal resistance around the $109 area.
Tuesday’s rally attempt wasn’t quite enough to break MON past this line of resistance. But the renewed life in the basic materials sector — coupled with the constructive posture of the chart — could break Monsanto stock out toward the $112-$113 area as a next upside target.
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