A Material World

09/27/04 03:33:32 PM

by Arthur Hill

While the Materials SPDR (XLB) is challenging its 2004 highs, the world's leading aluminum company, Alcoa (AA), is consolidating well below its 2004 high. Is this a buying opportunity for Alcoa or a selling opportunity for XLB?

Security: XLB and AA
Position: Hold

Sector plays an important role in a stock's performance and it makes sense to first evaluate the sector. Relative to the overall market, the Materials SPDR (XLB) has held up quite well. While the Standard & Poor's 500 formed a large falling price channel with lower lows and lower highs in 2004, XLB formed an inverse head-and-shoulders formation and is currently trading near neckline resistance just above 27. The S&P 500 shows selling pressure in 2004, and buyers have kept XLB near its 2004 highs. A breakout would forge a 52-week high and signal a continuation higher.

A look back at the Materials SPDR (XLB) and Alcoa charts reveals a large base and breakout in the summer of 2003 (green arrows). Both the sector and Alcoa participated in this breakout and advanced until January 2004. Even though Alcoa has underperformed the sector in 2004, I would view sector strength as bullish for the stock in general. In addition, continued sector strength with a neckline breakout would be expected to lift all boats, including Alcoa.

Expectations are one thing and reality is another. Alcoa (AA) declined with the sector from January to May, but failed to partake in the advance from May to September. Instead, Alcoa consolidated and formed a triangle over the last four to five months. Even though sector strength indeed bodes well, Alcoa was clearly not impressed with sector strength. To get the bull moving, the stock must first punch through triangle resistance at 33.4, and preferably on good volume. Such a move would put Alcoa back in line with sector performance and open the door to a test of the 2004 highs around 40.

Figure 2: Alcoa (AA)

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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