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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
It’s not often you hear someone mention the materials sector.
But, to me, it’s vitally important because it represents all the raw materials that go into manufacturing goods.
Of course, manufacturing goods plays a wide-ranging role in many parts of the economy. So naturally, I’m going to keep a close watch on the sector.
One way I keep tabs on this sector is through the Materials Select Sector Fund ETF (XLB). When we looked at XLB last month, it was in the midst of a major change…
Today, I’m going to revisit XLB to see how things panned out, and see what’s about to happen next.
So, let’s pull up the chart…
XLB Daily Price Chart
Source: eSignal
Having rallied over 130% from March 2020 to May 2021, XLB simply ran out of steam. After trying several times to rally higher in May (‘A’), XLB instead reversed – falling 12% to its low in July (‘B’).
This meant that XLB’s 14-month uptrend had come to an end.
When a rally as strong (and as long) as that finishes, it can be really hard to figure out what might come next. Sometimes, it’s just best to sit on the sidelines…
That’s because you don’t know how the emerging chart pattern will play out. Will XLB continue to fall, or will it find a base?
And, how do we figure it out?
From ‘A’, we could see that XLB was falling lower… but what we didn’t know then is how far it would fall. Only when XLB rallied from ‘B’ to ‘C’ did we see the first signs of a new chart pattern and the first countermove unfolding.
When I wrote about XLB in late August (red arrow), there were several different scenarios on the table…
For XLB to begin a new uptrend, we saw that first it would need to break above and hold ‘A’. Meaning, the resistance level at ‘A’ would need to turn into a new support level.
Or… for XLB to confirm a new downtrend, it would first have to break down through ‘B’ and stay below the blue horizontal line.
Since writing about XLB in August, however, the price action has provided plenty of new clues.
For instance, instead of rallying, XLB fell through September. That tells us that we can count out a new uptrend for now.
But what really got my attention over the past week was how XLB bounced off support (blue horizontal line).
Let’s take another look at the chart…
XLB Daily Price Chart
As you can see, XLB traded down to its previous low (‘B’) and bounced. That means two things…
First, a downtrend could be off the table for now. And second, we now have another point along that support line that has held (‘D’).
Remember, the more times a support or resistance level holds, the stronger that level becomes.
Also, notice how this bounce (‘D’) coincided with the relative strength indicator (RSI) forming a V-shaped trough.
This means XLB’s transition into a range-bound market is gathering momentum, and we can trade this by using mean reversion trades to pick up lots of tiny profits.
Right now, it’s still early… XLB has only just now held support. So, it might still be too soon to look at placing a trade.
However, the chart pattern is looking more promising. And that means XLB is a good stock to watch out for in the future.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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