Materials Run Into Historic Resistance
- Posted by JC Parets
- on February 19th, 2014
Many of the major US Stock Market sectors have already broken through their 2007/2008 highs. Healthcare, for example, is 60% above its 2007 all-time highs. Staples, Industrials and technology are all very much above those 2007 as well. Materials, however, are finally running into those highs now.
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First, here is a weekly bar chart showing the SPDR Materials Sector Index Fund $XLB running into all-time highs from 2008. After a historic crash followed by a recovery that was just as historic, the market has proven there is memory here. Last time we hit these levels, prices lost 60% over the next 10 months:
The next chart takes a closer look at the daily Japanese Candlesticks running into historic supply:
I can’t buy Materials up here with a straight face unless prices prove they can breakout and hold above this resistance. We’ve see what some of these other sectors have done upon their breakouts (healthcare is a great example), but Material prices have yet to prove they can absorb all of this overhead supply. I think it’s worth waiting for. Shorts, on the other hand, can use these levels as a stop. The risk/reward is definitely skewed in favor of the bears up here in the short-term.
The next chart shows the longer-term relative performance compared to the S&P500. 2008 support became support once again in 2012. But last year prices broke down to the lowest levels since 2006. Relatively speaking this is still a broken chart:
We can see that XLB/SPY has broken above this downtrend line from 2011, yet still below all of this broken support. If we start to see a breakout back above those lows, then we can make a solid argument for a relative overweight in the basic materials space.
There is a very high correlation between Materials and the S&P500. It’s a much stronger relationship than most people might think. Over the past year, we see a +0.96 positive correlation with the S&P500. Short-term the relationship is solid as well: +0.94 over the past quarter and +0.96 over the past month.
It looks to me like the reaction up here in Materials could be followed by the S&P500. Du Pont, Monsanto and Dow Chemical represent about a third of this entire ETF. So we’ll be watching closely.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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