Charts Suggest That Materials Sector Is Headed Higher

The materials sector of the financial markets comprises companies that work each day to discover, develop, and process raw materials. Raw materials are inputs used across a broad range of sectors and industries such as plastic, concrete, metals, and paper.

The relatively predicable nature of the underlying businesses often causes the sector to get overlooked by traders looking for volatility. In this article, we will look at why this fundamentally important sector could be the one to watch over the last several months of 2020.

Materials Select Sector SPDR Fund (XLB)

Active traders interested in buying into niche sectors such as materials often turn to exchange-traded products such as the Materials Select SPDR Fund (XLB). Looking at the chart below, you will notice that the price of the fund has recently moved above the 200-day moving average and in late summer started to trend higher.

Followers of technical analysis will be specifically interested in this chart because the increased buying pressure has triggered a crossover between the 50-day and 200-day moving average. This common long-term buy signal often marks the beginning of a major uptrend, and most traders will look to protect against a sudden pullback by placing stop-loss orders below the moving averages or dotted trendlines, depending on risk tolerance.

Linde plc (LIN)

As the top holding of the XLB ETF, Linde plc (LIN) will likely be the focus of many traders over the weeks ahead. Looking at the chart below, you will notice that the bulls have barley paused to take a breath since sending the price of the stock higher from its March low.

The recent retracement toward the support of the 50-day moving average could be enough of a reason for many bulls to consider adding to their positions or for others to buy for the first time. From a risk-management perspective, stop-loss orders will most likely be placed below one of the levels of support, depending on risk tolerance and investment horizon.

Air Products and Chemicals, Inc. (APD)

Another top holding of the XLB ETF and major competitor in the chemicals industry is Air Products and Chemicals, Inc. (APD). Looking at the chart below, you will notice that that the underlying trend is in clear favor of the bulls and that the momentum does not show signs of changing course any time soon.

For many followers of technical analysis, buy orders will be placed as close to current levels as possible because the combined support from the trendline and 50-day moving average could suggest that a major bounce higher could be in the cards at some point over the next several weeks. Stop-loss orders will most likely be placed below $281.76 or $240.36, depending on risk tolerance and investment horizon, in case of a sudden shift in sentiment or market fundamentals.

The Bottom Line

The materials sector is often relatively overlooked by market participants due to the nature of the underlying businesses. However, as shown on the charts above, nearby support levels and dominant upward momentum suggest that prices in the sector could be headed higher over the weeks and months to come.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.

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