[Chart Of The Week] Industrial Stocks Are Breaking Out!

JC Parets
August 12, 2016

The way I learned it, "The bigger the base, the higher in space". In other words, the longer prices consolidate in a narrow range, the more powerful the ultimate resolution. I think we have a good example of this type of behavior in the Industrial Sector. Today we're breaking down why I think there is a lot of room to the upside for these guys.

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[hide_from visible_to="member"]Industrials have gone no where since late 2014. While this might seem frustrating to anyone involved in this space from an intermediate-term horizon, I believe the patience is about to pay off. From my perspective there has been no reason to be long this sector since February last year when it ran into the 161.8% extension of the 2007-2009 decline.

You can see here just how hard this sector hit that brick wall we call a Fibonacci extension:

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XLI w

Let's break things down to a daily timeframe to see what's really going on here. From my perspective, there has been key resistance in this area since early last year. Minus the failed breakout in early 2015, we have seen consistent overhead supply for almost 2 years until this month when that former resistance turned into support for the first time. This is what we call "polarity", and is the only time we've seen this occur during this entire phase of consolidation:

XLI 1

From a risk management perspective, it seems clear to me that we want to be long Industrials if we're above the August lows. For a price target, we're in uncharted territory. The Industrial Sector has never been priced this high. But considering the massive base it took to get this space to break out, I would expect much higher prices. The 161.8% extension of this massive consolidation is up above $65 and that's where I think we're heading.

XLI d 2

We want to be taking profits once we achieve that upside objective. The risk is very well defined here for $XLI, so what more can we ask for?

The risk/reward here is skewed very much in favor of the bulls....

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Tags: $XLI

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