The materials sector, which comprises companies that conduct business in the chemical, construction material, containers and packaging, metals and mining, and forest and paper products industries, has recently experienced a significant pullback.
Based on the charts that we'll discuss below, it appears as though the selling pressure could be providing traders with an interesting buying opportunity with a reasonable amount of risk. We'll explore how these traders will likely be looking to position themselves over the weeks and months ahead and try to determine where exactly they will want to place their buy and stop orders.
Materials Select Sector SPDR Fund (XLB)
The materials sector has experienced a strong uptrend over the past six months, which you can see on the chart of the Materials Select Sector SPDR Fund (XLB). Traders will likely want to note how the upward-shifting 200-day moving average (red line) has provided support during sell-offs in the past.
Based on this past behavior, followers of technical analysis will likely be looking to place buy orders as close to $57.42 as possible. From a risk management perspective, stop-loss orders will most likely be placed below the 200-day moving average to protect against any major shift in fundamentals. Target prices will most likely be placed near the upper trendline at $62 in the event the price finds support near the ascending trendline and the 200-day moving average.
Linde plc (LIN)
Active traders who look to gain exposure to a niche sector such as materials often turn to exchange-traded products such as XLB mentioned above. For many investors, a popular strategy is to analyze the top holdings of these sector funds to gain insight into specific companies that could be worth adding to a diversified portfolio. In the case of the XLB fund, attention will likely want to be given to the top holding, Linde plc (LIN), which as you can see from the chart below is nearing the support of an influential trendline.
Air Products and Chemicals, Inc. (APD)
Air Products and Chemicals, Inc. (APD) is another major holding within the XLB ETF. For those who aren't familiar, the company has a market capitalization of approximately $51.5 billion, and it provides atmospheric gases, process and specialty gases, equipment, and services worldwide.
Taking a look at the chart, you can see that the price has recently moved above $126, which has proven to be an influential level of support and resistance. The bounces off of the newfound support level suggest that the bulls are in control of the momentum, and the recent pullback could be presenting the buying opportunity that many have been waiting for. Stop-loss orders will most likely be placed below $219.66 in case of a surprise move lower.
The Bottom Line
The materials sector has started to form a defined upward channel over the past several months, and based on the charts discussed above, materials stocks appear to be well positioned to make a move higher from current levels. Recent market weakness could be presenting an ideal buying opportunity for those who follow the charts and are willing to take on risk.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.