It’s no secret that some of last year’s most beaten-down sectors — like energy and materials stocks — also saw some of the sharpest reversals back up earlier this year off the January/February lows. While some of the reason for the rebound was structural and technical in nature, an important part of the equation was also a selloff in the U.S. dollar.
As the dollar began showing signs of strength again over the past few trading days, however, the Materials Select Sector SPDR (NYSEARCA:XLB) — representing the S&P 500 materials sector — has now seen the most serious selling pressure since January, registering notable bearish reversals on both the daily and weekly charts.
Active investors and traders should be looking to short XLB and other materials stocks once again.
Over the past few trading days, I have heard a myriad of reasons from investors why energy and materials stocks are seeing renewed selling pressure. Many reasons revolved around fundamentals, some about economic and technical factors — but to my surprise, few gave much credibility to the very strong bullish reversal that the dollar staged last week.
Call me old-fashioned, but when I see the dollar make a big move, I sit up and take notice.
In this case, if the dollar did just put in an important intermediate-term low, then risk assets — from stocks to commodities — should come under pressure.
On the weekly multiyear chart of the XLB ETF, we see that in April, an overshooting move occurred past horizontal resistance that resulted in many bulls chest-pounding over the return of the bull market.
“Not so fast,” says I. The bearish reversal over the past two weeks has taken the wind out of bulls’ sails.
Two weeks ago, the XLB closed the week off the intraweek highs, and last week this continued with follow-through selling. While so far this has simply led the materials ETF back to this previous line of resistance (which could now theoretically become support), if economic data continues to slow and the dollar continues the rally it began last week, then the XLB likely put in a meaningful top two weeks ago.
On the daily chart, we see that over the past few trading days, the XLB also saw its first four-day close below the yellow 21-day simple moving average since the big rally began in January, which also coincided with a break below the January uptrend as marked by the red dotted parallel lines.
Sure, this ETF could bounce a little here in the immediate-term. However, the technical damage as a result of the bearish reversal over the past two weeks, coupled with with the bullish reversal in the dollar, is clear. All else being equal, it should continue to put weight on this sector.
Active investors and traders could target a next target lower in the low $40s while respecting any sharp bullish reversal, particularly on a weekly closing basis, as a stop-loss signal.
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