Take a Look at This Overlooked Sector

Editor’s Note: In yesterday’s essay a proofing error resulted in an incorrect statement about inflation, by omitting the word “target.” The correct statement should have read “At one point, there were talks of getting rid of the inflation target altogether.” We apologize for the confusion and have updated the essay with the corrected edits.

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As regular readers will know, the S&P 500 index (SPX) is the first chart I look at every morning.

It provides an instant snapshot of how the overall market is performing.

Sometimes, though, I want to dig a bit deeper.

After all, it’s important to know how the different parts of the economy contribute to the whole.

To do this, I’ve written about various market sectors over the past month, like the energy and financial sectors… plus silver and gold.

Today, I’m turning our attention to one of my favorite sectors that’s often overlooked.

It doesn’t receive anywhere near the attention of the other sectors I just mentioned. But to me, it’s just as important…

I’m talking about the materials sector.

Materials are simply those products used in the making of goods.

These include construction materials, industrial chemicals, paints, gases, paper, forest products and even containers and packaging.

In a nutshell, if companies in this sector are performing well, then so is the economy.

One way I keep tabs on this sector is through the Materials Select Sector Fund ETF (XLB).

So let’s pull up the chart…

After bottoming out in March last year, XLB rallied strongly. From then until May this year, XLB gained 134%.

However, as you can see , XLB struggled to rally from there. In May, and early June, XLB failed three times to break above resistance (the green line).

We’ve discussed support and resistance levels quite a lot this past month. I can’t emphasize enough how much I use them with my trading.

That resistance level for XLB is right around $89.

After running into that resistance, XLB rebounded lower into June. There it traded sideways, before bottoming out in mid-July.

This price action corresponded with a downwards crossover between the two moving averages (MA).

The red line is a 10-day moving average (MA), showing the short-term trend. It crossed down over the blue line – a 50-day MA, representing the long-term trend. That’s normally a bearish signal.

However, XLB’s price action since then has caught my attention.

As you can see, the downtrend in XLB ran out of momentum. And, on August 9, XLB’s 10-day MA broke back above the 50-day MA. Typically, that represents a bullish signal.

However, what happens next is key… and that comes back to the previous resistance level at $89.

Earlier this month, I wrote why sitting out doesn’t mean missing out. That’s because being patient and waiting for a trade setup can be more rewarding (and profitable) than trying to jump on every move.

So, that’s what I’m doing now.

I’m waiting to see if XLB can break through that previous resistance ($89) and hold that level.

In the past, I’ve mentioned that if a stock falls below a support level, that level can turn into a resistance level.

Well, it works the other way around too. So, if XLB breaks above and holds that $89 level, that could become a support level for XLB in the future.

While this move higher in XLB looks promising, it’s still early. For now, we need to be patient and sit on the sidelines.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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