Materials stocks — as represented by the Materials SPDR (NYSEARCA:XLB) — had an ugly year in terms of performance right into the late-September abyss. While the sector has rebounded sharply off those lows along with the broader stock market, overhead resistance through a technical lens is meaningful at this juncture.
XLB ETF Charts
Starting right off with the relative chart of the XLB divided by the SPDR S&P 500 ETF (NYSEARCA:SPY), we can see that despite massive underperformance year-to-date (as well as in recent years), the relative price action since August is increasingly taking the shape of an inverse head-and-shoulders pattern. Of course, this pattern has bullish implications, but that could take a while longer to play out.
It also is noteworthy that just because the relative picture for materials stocks looks promising, these stocks won’t necessarily rise in absolute terms.
Still, at the margin, this is relatively bullish for materials stocks.
Looking at the XLB ETF from a multiyear weekly perspective, note that after breaking back below the black horizontal line in August it is now back up at this line. Will former support now turn into resistance? Technical analysis 101 would dictate that to be the case, and it is certainly worth a pause at the very least.
On the lower part of the chart I plotted the dollar index, which for the most part this year has formed what looks to be a bullish flag pattern. This pattern, should it play out as indicated, calls for a break higher and thus a resumption of the thus far 15-month trend. Should the dollar index break higher, then that would arguably also put some pressure on materials stocks.
In other words, through this lens, the bears have a valid argument to at least call for a pause in the sharp rise in materials stocks that we saw in October.
On the daily chart, we see that the sharp rise off the September lows has taken the shape of a rising wedge pattern, which tends to have a good probability of resulting in a mean-reversion move lower. Also note that horizontal resistance is just above current levels, and that last Friday the XLB ETF closed well off its intraday highs, right at the blue 10-day moving average.
From a momentum perspective, the XLB is also well overbought as indicated by the MACD oscillator at the bottom of the chart.
All in all, active investors and traders could look to sell short the XLB for at the very least some near-term consolidation, which could see better support again in the $42 – $43 area.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
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