2 key sectors top out
Materials and industrials look technically vulnerable, meaning investors should exercise caution and have tight stops in place.
- This high was well above the February high of $38.08 (point 1)
- The weekly on-balance volume (OBV) made its high in February but formed a lower high in May (point 2), just barely making it above its flat weighted moving average (WMA). This is a negative divergence consistent with a top formation
- The divergence has been confirmed this week, as the OBV has dropped below its prior low and is now in a downtrend
- The weekly OBV support at line b is well below current levels
- Support for XLI on the weekly chart is at $34.44 and the 40-week moving average (MA). Chart support from the 2010 highs is at $33.50
- The chart formation has initial downside targets at $34.50 with the 38.2% retracement support at $34.35. The 50% support is at $32.90
- The daily OBV did make a new high with prices, but I have found the weekly OBV to be more important when the weekly and daily disagree
- Daily OBV has also just turned down from its weighted moving average, and a break of support at line e should precede a break of price support
- Short-term resistance is now at $38.60 and then $39.00
- There is more important trend line support on the weekly chart at $37.45
- XLB is also below its 40-week MA, which has started to flatten out\
- The weekly OBV failed to confirm the new price highs, as indicated by line c, and it violated its uptrend (line d) this week. This is negative and suggests a drop below the March lows at $36.44
- The volume over the past two weeks has been heavy
- Support on the weekly chart from the May 2010 highs is at $35.47
- The next support on the daily chart is at $36.44, which is just above the 38.2% retracement support, as calculated from the summer 2010 lows
- The 50% retracement support is at $34.50
- The daily OBV shows a series of lower highs, line f, and it broke its uptrend (line g) in early May
- Last week’s bounce in XLB took the OBV back to its declining weighted moving average, which is a bearish formation. The OBV is already below the April lows and appears to be leading prices
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After enjoying a smooth rise in stock prices since May, investors are about to be hit with another bout of volatility.
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