Alcoa Drags Materials Lower

04/15/04 08:38:07 AM

by Arthur Hill

Even though Dow and Dupont are the two biggest components of the Materials SPDR (XLB), recent weakness in Alcoa (AA) is pulling the sector lower.

Security: XLB and AA
Position: Sell

Alcoa is the third largest component and makes up over 9% of the Materials SPDR (XLB). There are two patterns at work and one has already been confirmed as bearish. First, the stock formed a large symmetrical triangle over the last few months (magenta trendlines) and broke the lower trendline in late March. This was negative, but AA bounced off support from the late January low and moved back above 35 for an immediate challenge.

Figure 1: Daily chart of Alcoa.

Graphic provided by: MetaStock.

The second pattern is a large descending triangle marked by the upper magenta trendline and green support line. Notice the lower lows over the last two months (gray arrows). These show selling pressure at lower and lower prices as buyers are unable to push prices above the prior high. Support around 33 represents demand's final stand. A close below this support line would signal a victory by supply, confirm the descending triangle and argue for further weakness below 30.

Figure 2: Chart of XLB.

The Materials SPDR (XLB) advanced from 17 to 27 (Mar-03 to Jan-04) and then formed a large rectangle/consolidation over the last few months. The stock broke above resistance briefly in early March, but this breakout quickly failed and the subsequent decline broke below the April trendline (red arrow). This was the first warning sign and the stock appears to have formed a lower high in early April (gray arrow), thanks in part to AA. A close below key support at 25 would break the large rectangle and turn the trend bearish for XLB.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Alcoa Drags Materials Lower

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