Basic Materials have been more like Diamonds

• Posted by Greg Harmon
• on January 23rd, 2018

Which rock would you rather have? Traditionally this would be an easy call. The lump of coal on the left is dirty, can be used to heat the room for a little bit and then it is gone. Just ashes. The rock on the right has many more attributes. The hardest substance, a symbol of eternal love, it sparkles with light. Seems to be an easy call. I’ll take the ……

But wait, that lump of coal or more generally all basic materials, have been in high demand. The stock prices of Basic Materials companies have been soaring. The chart of the Basic Materials ETF ($XLB) below tells the broader picture. Where the price of retail Diamonds have been flat for the past 6 months, the Basic Materials ETF has gone up over 16%. Now which do you choose?

The chart shows a move up out of support in August to a top in October. Then after a minor pullback in a bull flag a second run higher to consolidation at the current price level. That consolidation is taking on the form of a Diamond itself. Often thought of as a topping pattern, the Diamond can resolve either higher or lower, and expects the same move out of the pattern that it had into it.

A resolution to the upside would give a target to 69 and the third leg would complete a 3 Drives pattern. A resolution lower would look for a retracement to the November low. The RSI has worked off an overbought condition and remains high in the bullish zone. The MACD is high and looking ready to cross down. These may give clues as to which way this pattern breaks but follow the price action.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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