Tuesday, February 19, 2008

A Closer Look At the Basic Materials Sector

Basic materials is a market sector that has done very well during the latest bull market run. As the world has engaged in more and more infrastructure spending we've seen the likes of steel, iron and other basic materials companies rally. So, let's take a look at the XLBs to see where they are in the cycle.

Above is a five year weekly chart. Notice a clear higher high and higher low patter along with increasing volume over the 5 years period. It's possible the last year or so was seen a "buying frenzy" where everybody and their brother feels the need to get into the sector.

This is a one year daily chart. There is no clear topping pattern emerging. In his book Profits in the Stock Market, Gartley lists seven reversal patterns. One of them is called "complex" and it could also be called, "I have no idea what this is."

There are two lines of support and resistance that seem to exist at roughly 38 and 43. However, those levels are pretty subjective and there is legitimate room for doubt about where the lines should be.

The SMA picture is very confusing. Notice the following:

-- Prices are right around the 200 day SMA, which is the traditional line between a bull and bear market

-- The 50 and 200 day SMA are both moving in a more or less straight line.

-- The 10 and 20 day SMAs are both heading up, but their overall position is pretty messy.

Short version, this sector is still technically in a rally. But it's also looking for direction.