Focus on Materials Stocks

07/16/2009 12:01 am EST


Thomas Aspray

, Professional Trader & Analyst

The dominant question facing investors and market professionals in mid-July 2009 is whether the recent correction is just a pullback in the uptrend from the March lows, or is the bear market rally over and are stocks headed back towards the March lows? From a technical perspective, this is most likely a correction within the intermediate-term uptrend, and if so, those sectors that rallied most from the March lows should be the stocks to watch during this correction.

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The Materials sector put on a stellar performance as the Dow Jones Materials Index rose from a low of 112 in early March to a high of 195 on June 11th. The first leg in the correction (point a to b) was quite sharp, as the 38.2% support level was quickly reached. The sector then rebounded for a week or so (point c) before turning lower again. The 50% retracement support lies at 154, and if the decline from point c to d is the same length as from point a to b, then we get a target in the 144-146 area. This also corresponds to the 61.8% support level. This severe of a decline should be enough to turn the sentiment quite negative. The intermediate analysis on the sector, groups, and stocks suggests that the current correction is a buying opportunity, and therefore, I will take a look at some of the Materials stocks that I found the most interesting.

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For those of you who are more interested in trading ETFs, I will start with XLB, the Materials Select Spyder ETF.  XLB is not far above the 50% support level at $23.35, with the 61.8% support level at $22. A drop below the March 20th lows of $20.98 would be very negative. On the upside, a move above the June 18th highs of $26.65 should be enough to turn the daily momentum positive. It should be pointed out, though, that many respected analysts and traders are starting to favor individual stocks as opposed to ETFs on the grounds that the stocks have better potential.

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Looking at the groups within the Materials sector, they all appear to be undergoing normal corrections after their respective rallies from the March lows. The precious metals look the weakest, while one of the best looking is the paper products, even though the group is up over 200% from the March lows, and thus, may appear overbought. The correction has been shallow, as the daily chart shows a trading range with resistance at 54.50 and support at 41.40. On an upside breakout from this range, the paper products group should test the major 38% retracement resistance in the 80 area. The 50% retracement level stands at 100.

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MeadWestvaco (MWV) has a wide range of businesses, but I consider it to be a paper stock rather than a specialty chemical or consumer product stock. With an early-March low of $7.53, MWV rallied sharply to the $17.50 area, peaking in early May and consolidating since, as indicated by lines a and b. The daily chart shows converging support in the $13-$13.50 area (lines c and d). On a breakout above $17.50, MWV should rally to the $21-$22 area.

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The coal stocks had an impressive rally from the March lows, as Massey Energy (MEE) rose from the $10 area to over $26. The correction over the past month or so has been almost as dramatic. One of the reasons I favor the material stocks over the intermediate term is because of the strong bullish readings of the weekly studies like those on MEE. The weekly OBV just barely dropped below its WMA on the test of the lows in March before surging above the resistance (line b). The OBV did make a new all-time high in June (point c) before the recent correction. The daily chart shows that good support in the $16-$17 area has now been reached, with long-term support just below $10 (line e). On a move above the strong weekly resistance in the $25 area (line a), MEE has targets at $40.

NEXT: More Top Stocks from Materials Sector |pagebreak|

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Southern Peru Copper (PCU) is part of the nonferrous metals group, and the daily chart shows a well-defined trading channel with the lower boundaries and the 50% support level now in the $17-$18 area. The more important 61.8% support lies just above $15, so a close below this level would be bearish. A test of the upper trading channel would take PCU to the $27-$29 area. As noted recently, the long-term technical picture looks positive for copper, and this will be supportive for PCU.

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Not all of the materials stocks have had sharp corrections, however, and the normal interpretation of those stocks with minor pullbacks is that they should lead the market higher once the correction is over. Such a stock is Ashland Inc. (ASH), which is a chemical company. ASH is so far holding the minor 23.6% support with the 38.2% support just below $21. The daily chart shows a classic continuation pattern (lines a and b) and a move above $28 will project a rally to at least the $37 level. The volume has declined as the continuation pattern was being formed, so look for an increase in volume to confirm a breakout.

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BHP Billiton (BHP), a metal-mining company, is often in the news, and after peaking just below $63, has dropped back to the $48-$49 area and the 38% support level. The daily uptrend (line a) comes in at $47, with the 50% retracement support just below $44. There is major chart and retracement support in the $39-$40 area. Once the correction is over and on a move above the recent highs, BHP should test the major retracement resistance in the $70 area.

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One of the steel stocks that is now testing key support is AKS Holding Corp (AKS), as it held the support in the $14.60-$15 area (line a) last week. The band of support in the $12-$15 area looks quite strong. A move above $18.50 would complete the continuation pattern and give upside targets in the $22-$23 area. The major 38% retracement resistance level is at $31.50.

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Syngenta AG (SYT) is an agribusiness company that made its lows last fall in the $27-$28 area and then formed a five-month trading range between resistance at $44 and support at $36 (lines a and b). SYT broke out of this range in May and rallied to a high of $51.67, testing the major 61.8% resistance level before turning lower. The recent correction has taken SYT back to former resistance and now support in the $44 area, with the flat 200-day MA in the $40 area. A daily close above $48.25 should signal that the correction is over.

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Hexcel Corp (HXL) is a multi-faceted company but a major area of its business is in plastics. The long-term downtrend in HXL was broken in April and then retested in May before a sharp rally to the $14 level. Now, HXL is back to support in the $8.50 area and the ranges have narrowed considerably. Such a contraction in volatility is generally followed by a much higher level of volatility, and the longer-term pattern suggests it will be to the upside.

I began this article the week ending July 10th and some of the stocks mentioned have already bounced sharply from support as most stocks have rallied sharply so far this week. If any of the stocks have moved too far away from support, I would suggest waiting for a one- or two-day pullback in the next week or so if you are considering long positions.

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