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Active Traders Remain Bullish on Materials

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The basic materials sector – which comprises market segments such as chemicals, containers, packaging, metals, mining and forest products – is often one of the best market hedges due to the underlying demand for its products. In this article, we take a look at several key charts from within the materials space and try to determine how active traders will be looking to position themselves over the weeks or months to come. (For a quick refresher on this sector, check out: Materials Sector: Industries Snapshot.)

Materials Select Sector SPDR Fund (XLB)

Retail investors looking to gain exposure to the materials sector usually turn to exchange-traded products such as the Materials Select Sector SPDR Fund. As the name suggests, this fund is designed to track the Materials Select Sector Index and comprises 25 holdings. Taking a look at the chart, you can see that the price has recently closed above an influential trendline, which suggests that the bulls are in control of the momentum. Active traders will place their buy and stop orders as close to the dotted trendline as possible to maximize the risk-to-reward and prevent losses. Based on the current position, traders will most likely set their target prices near the 2018 high around $64. (For further reading, see: The 3 Largest Materials ETFs.)

Technical chart showing the performance of the Materials Select Sector SPDR Fund (XLB)

DowDuPont Inc. (DWDP)

With a weighting of 21.96% of the XLB ETF, DowDupont represents the largest holding of the fund. Taking a look at the chart below, you can see that a well-defined double bottom pattern has formed. This is a commonly used reversal pattern because it is a graphical representation of the shift between excess supply vs. demand. The close above the horizontal trendline is the technical signal that the trend has reversed and that the bulls are solidly in control. Based on this chart, active traders would expect the price to rise over the coming weeks, and many will likely set their target prices near $76, which is equal to the height of the pattern plus the entry. (For further reading, see: Traders Turn Defensive and Look to Basic Materials for Support.)

Technical chart showing the performance of DowDuPont Inc. (DWDP) stock

Praxair, Inc. (PX)

Another top holding of the XLB ETF that is gaining the attention of active traders is Praxair. Taking a look at the chart below, you can see that the stock is trading within a defined range and looks poised for a move higher. This chart is an interesting example of how a security’s price often acts quite predictably around major trendlines such as the ones identified. Notice how trendlines can often act as accurate guides for placing orders. The next level of specific interest to active traders will be $166 because a move above that level would likely trigger a flood of buy stop orders. (For further reading, see: What are the primary reasons for investing in the chemicals sector?)

Technical chart showing the performance of Praxair, Inc. (PX) stock

The Bottom Line

The materials sector is often regarded by investors as a haven from uncertainty and volatility because of the fundamental demand for the underlying products. Based on the chart patterns discussed above, it appears as though this sector will continue to be a pillar of strength in this market, and the current risk-to-reward setups are creating lucrative buying opportunities. (For further reading, see: 3 Charts Suggest Commodities Uptrend Is Just Getting Started)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.

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May 22, 2018

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