Companies that do business in the materials sector focus their efforts on the discovery, development and processing of raw materials. While this group doesn't nearly get the same level of attention as other more lucrative areas, the cyclical nature of the group makes it a favorite among active traders. In this article, we'll take a look at several charts from across the materials sector and discuss how the patterns suggest that we could be in the early stages of a long-term uptrend. (For a quick refresher, check out: Traders Turn Defensive and Look to Basic Materials for Support.)
Triangles are some of the most commonly relied upon chart patterns in an active trader's toolkit. These patterns can often be found during a period of consolidation during a defined trend. In the case of the materials sector, as measured by the Materials Select Sector SPDR Fund, you can see that the recent breakout is suggesting that the bulls are in control of the next leg of the uptrend. In addition, the recent buying pressure has triggered a bullish crossover between the 50-day and 200-day moving averages. This golden crossover is one of the most commonly used buy signals and generally marks the beginning of a long-term uptrend. Active traders will likely set their target prices near $64.50, which is equal to the entry price plus the height of the pattern. (For more on this topic, check out: The 3 Largest Materials ETFs.)
When it comes to the materials sector, active traders generally turn to DowDuPont, which has a market capitalization of $157 billion. The company is the largest holding of the XLB fund and has recently broken above the long-term resistance of its 200-day moving average. The chart of DowDuPont is of specific interest to active traders at this point because its 50-day moving average crossed above the 200-day moving average, and the proximity of the price makes current levels very lucrative in terms of risk/reward. Target prices will most likely be placed around the 2018 high near $76. (For related reading, check out: Materials Sector: Industries Snapshot.)
Praxair, Inc. (PX)
Praxair is another commonly traded materials company, and it represents nearly 8% of the XLB fund. Taking a look at the chart, you can see that the stock is trading at the top end of a defined range, and the recent price action suggests that the bulls will be ready to trade a move higher in the event of a break above $168.54. Stop-loss orders will likely be placed below the 200-day moving average, which is currently trading at $155.06. (For more, see: Active Traders Remain Bullish on Materials.)
The Bottom Line
Active traders have been turning their attention to the materials sector given the bullish chart patterns and close proximity to major levels of support. Recent bullish crossovers between long-term moving averages suggest that we could be in the early stages of a prolonged uptrend. (For further reading, see: 3 Charts That Suggest It's Time to Buy Basic Materials Stocks.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.