Because of the underlying need for its goods, the basic materials sector—which includes market categories such as chemicals, containers, packaging, metals, mining, and forest products—is often one of the greatest market hedges. In this post, we will look at many significant charts from the materials market to see how active traders will position themselves in the next weeks or months. (See Materials Sector: Industries Snapshot for a short reminder on this sector.)
Retail investors seeking exposure to the materials industry often use exchange-traded funds like the Materials Select Sector SPDR Fund. This product, as the name implies, is meant to follow the Materials Select Sector Index and has 25 holdings. Looking at the chart, you can see that the price just closed above an important trendline, indicating that the bulls are in charge of the momentum. To optimize the risk-to-reward ratio and avoid losses, active traders will set their buy and stop orders as near to the dotted trendline as feasible. Traders will most likely set their target prices around the 2018 high of $64, based on the present position. (For further information, see The 3 Largest Materials ETFs.)
DowDuPont Inc. (DWDP)
DowDupont is the fund’s biggest position, accounting for 21.96% of the XLB ETF’s weighting. Looking at the chart below, you can see a well-defined double bottom pattern has developed. Because it represents a graphical depiction of the shift between excess supply and demand, this is an often used reversal pattern. The closing above the horizontal trendline indicates that the trend has turned and that the bulls are firmly in charge. Based on this chart, active traders would anticipate the price to grow in the next weeks, with many likely setting their target prices around $76, which is equal to the pattern’s height plus the entrance. (For more information, see Traders Go Defensive, Seeking Basic Materials for Support.)
Praxair, Inc. (PX)
Praxair is another top position of the XLB ETF that is attracting the attention of active traders. The chart below shows that the stock is moving inside a defined range and seems to be set for a move upward. This chart is an intriguing illustration of how the price of an asset frequently behaves predictably around key trendlines like the ones shown. Take note of how trendlines may often serve as reliable guidance for setting orders. The next level of particular interest to active traders will be $166, since a rise over that level would almost certainly result in a deluge of buy stop orders. (For further information, see: What are the main motivations for investing in the chemical sector?)
The Bottom Line
Because of the intrinsic need for the underlying goods, investors often see the materials industry as a safe haven from uncertainty and volatility. According to the chart patterns highlighted above, this sector looks to be a pillar of strength in this market, and the present risk-to-reward combinations are producing excellent purchasing opportunities.
StockCharts.com provided the charts. Casey Murphy had no position in any of the securities mentioned at the time of publication.
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