Will the materials slump continue?
Materials are likely to underperform sector leaders like health care and consumer staples this summer. Here’s the latest chart action for the materials sector ETF and three of its key holdings.
- The initial support lies at the gap in the $39.54-$39.89 area with the uptrend (line b) a bit lower at $39.31
- A violation of the swing low at $38.44 would signal a drop back to the March lows at $36.44, if not the 38.2% support at $36.10
- The pattern in the on-balance volume (OBV) looks toppy considering that while XLB was making higher highs, the OBV was forming lower highs (line d). A break of its weighted moving average (WMA) and the uptrend, line e, would generate a short-term sell signal
- XLB would need to close above $41.16 to turn the short-term momentum positive
- Since reversing in early April following disappointing earnings, the stock has been in a narrow range, trying to hold the 38.2% support at $65.50
- The March 15 low was $64.29 and there is additional chart support from last fall at $63.50-$64 with the 50% retracement support at $62
- The heavy selling in early April (point 1) dropped the OBV below support at line g. It has just rallied back to its declining weighted moving average, which is a short-term negative. The weekly volume (not shown) is still above its WMA
- There is first resistance now at $68.50-$69.50 with additional resistance at $71. The downtrend (line e) is at $73.50
- There is now short-term support at $16.44-$16.50 and then at $15.72-$15.88, which corresponds to the April lows and trend line support (line b)
- The 38.2% retracement support is at $15.20 with the 50% support level at $14.20
- The daily OBV peaked in early 2011 and has since formed lower lows (line c) while AA was moving higher, line a. This divergence indicates that fewer buyers have been pushing AA higher
- The daily OBV has violated its uptrend, line d, which goes back to last summer’s lows. It is now trying to move above its WMA, but needs to break above the downtrend (line c) to turn positive
- The weekly OBV (not shown) is still holding above support
- A daily close above $17.80 would be positive
- The daily OBV is testing its flat weighted moving average and shows a broad trading range for most of the year (lines f and g). The OBV dropped sharply in March, but then rebounded in April, testing its highs (line f)
- A drop in the OBV below the April lows should precede heavier selling
- So far, NUE has held the 38.2% support at $44.60 on a closing basis, with further support at $44.20-$44.34, which encompasses the April and March lows
- If these levels are broken, the 50% support stands at $43.20 with the 61.8% support at $41.75
- A daily close above the April high at $48 would be a short-term positive
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