Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
The materials sector often flies under the radar.
After all, it’s not as exciting as tech or even cryptocurrencies.
In fact, some investors might even find it boring… But, that doesn’t mean it’s not useful (and profitable).
The materials sector helps me gauge the economy’s health. That’s because more raw materials translates into more products hitting the market.
And that’s what helps the economy either scale or fail… providing good trading opportunities along the way.
One of my favorite ways to trade this sector is through the Materials Select Sector SPDR Fund ETF (XLB).
When we looked at XLB late last month, it had just bounced off support.
Let’s see what has happened since then…
Materials Select Sector SPDR Fund ETF (XLB)
There’s two distinct patterns here…
The first is the uptrend that lasted until its peak in May. Next is the sideways pattern that emerged after XLB retreated from its all-time high.
I find that our two moving averages (MA) offer so much clarity…
Throughout the uptrend phase, the short-term 10-day MA (red dashed line) stayed above the long-term 50-day MA (blue dashed line).
But after XLB had peaked, the 10-day MA rolled back down over the 50-day MA – ending the uptrend.
Throughout its most recent phase, the 50-day MA has shown that XLB is in a range-bound (sideways) market. The 50-day MA (blue dashed line) has been almost flat, with the short-term 10-day MA criss-crossing several times over the last few months.
The price levels confirm the sideways market too…
The upper and lower bands of this trading channel are defined by the dark blue horizontal lines. ‘A’ is the support level and ‘B’ is the resistance level.
Until XLB breaks out of this current channel, there’s only one way to trade it… with a mean reversion strategy.
When I wrote about XLB on September 27 (red arrow on the chart), the Relative Strength Index (RSI) had formed a ‘V’ from an oversold signal, along with XLB bouncing off support (‘A’).
Because of that, I wrote that XLB was unlikely to break support.
As you can see, XLB went on to re-test this level… and held. Since then, it’s been rallying higher.
Let’s take another look at the chart…
Materials Select Sector SPDR Fund ETF (XLB)
If you look at the bottom half of the chart, the RSI has been trending higher and showing increased momentum throughout XLB’s recent rally.
This is a textbook example of how to apply the RSI. We have an oversold signal forming a ‘V’ and the RSI then trending higher as the stock bounces off support and rallies.
(I really hope that by now you’re gaining an appreciation for how useful the RSI can be!)
Most recently, XLB has traded back above its 50-day MA – with the 10-day MA just crossing above it. It could soon test XLB’s resistance level (B).
So, what am I expecting from here?
The answer lies with the RSI and the resistance level (B).
You can see that as XLB closes in on resistance (B), the RSI is also closing in on the upper grey horizontal line above, which gives an overbought signal (above 70).
When the RSI formed an inverted ‘V’ back in August, that coincided with XLB rolling over and trading down.
If the same action repeats this time, then that could provide an opportunity to go short. For now, we’ll continue to monitor the chart pattern closely and see how things play out…
Editor, Trading With Larry Benedict
I’d like to thank my readers for their feedback on my recent essays. Here are some of the responses I’ve received…
Hi Larry and team!
I’m new to investing but am soaking up all the knowledge I can (when I am not working the frontlines in medicine as a doctor at our local county hospital). I’m really enjoying your analysis and newsletter.
Thank you for providing this education to those of us who are following closely during these uncertain times. Thanks for your response and for your great newsletter. I really appreciate it!
Your information is always clear, precise, and gets to the point. I totally appreciate your updates. It’s completely refreshing and useful. Thank you.
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