XLB Shows Weakness

03/18/11 11:46:20 AM

by Chaitali Mohile

The technical charts of the Material Select Sector SPDR show more weakness in upcoming sessions.

Security: XLB
Position: Hold

A bullish rally of the Material Select Sector SPDR (XLB) paused at 40 levels. The lower lows of the relative strength index (RSI) (14) highlighted a negative divergence for the existing bullish rally. Therefore, the XLB tumbled from the peak, indicating a top formation. Earlier, the index had bounced from its 50-day moving average (MA) support. But in the current scenario, XLB has breached the MA support without showing any signs of recovery. We can see in Figure 1 that the index has plunged to $37.50. Here, a bullish engulfing -- a bullish reversal candlestick pattern -- has been formed. However, the lower lows of the RSI (14) and a developing downtrend of the average directional index (ADX) (14) are showing significant weakness in the near future.

FIGURE 1: XLB, DAILY

Graphic provided by: StockCharts.com.

The bullish engulfing pattern is followed by a doji candlestick and then a white bullish candle. In addition, the price rally has the 50-day MA resistance. Therefore, a pullback rally is not currently indicated in Figure 1. XLB would initiate a confirmed and stable relief rally only by converting the MA resistance to support. In the meantime, traders can stick with their short positions.

FIGURE 2: XLB, WEEKLY

Graphic provided by: StockCharts.com.

After the 200-week moving average (MA) breakout on the weekly time frame in Figure 2, XLB formed an ascending channel. The bullish rally within the channel was healthy till the indicators were bullish. However, a double-top formation above the 70 levels of the RSI (14) was the bearish alarm for the rally. As a result, the bullish price action reversed. Gradually, the lower trendline of the channel was breached, suggesting a major bearish breakout in Figure 2. The ADX (14) is indicating the descending uptrend, and the RSI (14) is moving near the center line. Although neither indicator has still slipped into the bearish areas, they are highlighting the current weakness in the rally.

Therefore, recovering the lost levels would be a tough task for the index. The corrective rally of XLB is likely to settle at 33 levels.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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TECHNICAL ANALYSIS

XLB Shows Weakness

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