The basic materials sector is often turned to by active traders because of the nature of the products produced by companies across the sector. The production of raw materials including metals, chemicals, and forestry products often creates relatively predictable trends and often acts as a hedge to overall market volatility. In this article, we will look at several charts from across the basic materials sector and try to determine how followers of technical analysis will be positioning themselves over the weeks and months ahead.
iShares U.S. Basic Materials ETF (IYM)
Active traders who are interested in gaining exposure to key market segments such as basic materials often turn to exchange-traded products such as the iShares U.S. Basic Materials ETF (IYM). Fundamentally, the fund comprises 35 holdings and has total net assets of approximately $776.5 million. Looking at the chart below, you can see that the price of the fund has been stepping higher haver periods of consolidation.
The recent break beyond the dotted trendline near $115 suggests that the bulls are in control of the momentum and that a new leg of the uptrend could just be getting underway. From a risk-management perspective, traders will likely maintain a bullish outlook on the sector for months to come and place stop-loss orders below $108.19, one of the dotted trendlines, or the 200-day moving average, depending on risk tolerance and outlook.
DuPont de Nemours, Inc. (DD)
As one of the top holdings of the IYM, Dupont de Nemours, Inc. (DD) will likely be one of the most closely watched companies in the basic materials sector over the weeks ahead. The strong bounce from the nearby support of a dotted trendline and the uptick in trading volume suggest that the bulls are in control of the momentum. Bullish traders will likely look to place orders as close to the dotted trendlines as possible and place stop-losses below $64.27 so that they can make the most of the risk/reward setup.
The basic materials sector is subject to the law of supply and demand in the same way as consumer goods are. In fact, they are closely interrelated. If the demand for consumer goods drops, the demand for the raw materials involved in their production also drops. The basic materials sector also is affected by shifts in the housing market, as many raw materials are finished in order to be used in construction projects. If new housing development slows, the demand for lumber products decreases.
Ecolab Inc. (ECL)
Another company in the specialty chemicals industry that could capture the attention of traders over the weeks ahead is Ecolab Inc. (ECL) Looking at the chart below, you will notice why this stock is likely on the radar of many followers of technical analysis. The 200-day moving average has acted as a strong level of support since the price recovered from last March's selloff. The sideways price action that dominated most of 2020 is now regarded as a period of consolidation, which is commonly found prior to the start of a major trend.
Looking closer, the recent upward divergence between the long-term moving averages suggests that the bulls are in control of the momentum and that a long-term uptrend could just be getting underway. Stop-loss orders will most likely be placed below $211.30 or $198.48, depending on risk tolerance and investment horizon and to protect against a sudden shift in market sentiment or company fundamentals.
The Bottom Line
The basic materials sector may not be as exciting as some other market segments such as technology or healthcare, but charts discussed above suggest that this segment could be one to watch over the months ahead. Nearby support levels put the risk/reward in the favor of the bulls while also providing clear guides for determining the placement of stop-loss orders.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.