One of the major themes this year has been the rotation out of Big Tech into “old economy” stocks.
That change in money flow helped drive the Dow’s meteoric 21% rise from its October lows… It saw the Dow generate its best monthly performance in almost 50 years.
But as we noted on November 16, it wasn’t just the Dow Jones that enjoyed the huge rally.
The Materials Select Sector Fund (XLB) – a sector that supplies many of the basic ingredients to those old-world stocks – enjoyed an even bigger boom…
It rallied around 25% over the same time.
However, both XLB’s and the Dow’s massive rallies have petered out since the start of December. So today, I’m going to check out what’s coming next…
Countermoves Within the Downtrend
On the chart below, the 50-day moving average (MA – blue line) shows that prior to its October rally, XLB had been in a downtrend for most of the year.
That’s marked by the lower highs at ‘A,’ ‘B,’ ‘C,’ and ‘D.’ Take a look…
Materials Select Sector SPDR Fund (XLB)
Source: eSignal
The chart also shows that XLB has seen plenty of countermoves within this overall downtrend…
The 10-day MA (red line) has crossed the 50-day MA multiple times, often at sharp angles.
When we last looked at XLB (red arrow), we saw that after falling from ‘C’, XLB had found a short-term base and rallied in mid-July.
This coincided with the Relative Strength Index (RSI) forming a ‘V’ and rallying from oversold territory (lower grey dashed line).
That rally then accelerated when the RSI broke up through resistance.
The same pattern that happened with ‘C’ then repeated after XLB retraced from ‘D’… and we saw XLB rally from October into November.
However, another chart pattern has now caught my eye. Take another look…
Materials Select Sector SPDR Fund (XLB)
Source: eSignal
As the chart shows, while XLB has been making higher highs (upper orange line), the RSI has been making lower highs (lower orange line).
When these two diverge, a change of direction is often in the cards…
And with the RSI now tracking back down toward support, what happens around this level will be key.
So what am I expecting around here?
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Another Leg Down?
As XLB retreated from each of its lower highs at ‘A’ through ‘D,’ those moves accelerated when the RSI broke down through support.
So for XLB to have any chance of resuming the upward move that began in October, the RSI must hold this support level.
If the RSI breaks down and gains traction in the lower half of its range, then we can expect XLB’s downward move to accelerate (as we saw in those moves from ‘A’ through ‘D’).
I’ll also be watching our MAs…
During XLB’s October rally – on top of the RSI breaking through resistance – the 10-day MA broke through and accelerated above the 50-day MA.
However, right now, that pattern looks to be reversing…
If the 10-day MA breaks back below the 50-day MA and the RSI gets stuck in its lower band, then we can expect XLB to make another major leg down.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, a One Ticker Trader member thanks Larry for a successful trade recommendation…
Larry, I just wanted you to know that I made my first profit using your One Ticker Trader. I’m looking forward to your next recommendation. Keep up the good work!
– Bob M.
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