Four Top Plays From a Market-Leading Sector

By MoneyShow.com  OCT 18, 2012 1:35 PM

Materials stocks have been leading the recent rebound. Here's a look at the charts of four of the sector's top plays to determine the right entry points.

 


The stock market put in another strong performance Tuesday, as the Advance/Decline numbers were 3:1 positive—even stronger than Monday.

This supports the view that the correction from the September highs has traced out a flag or triangle formation. This is a typical continuation pattern, with upside targets for the Spyder Trust (NYSEARCA:SPY) in the $149 to $151 area.

The materials sector led the charge, as the Select Sector SPDR Materials (NYSEARCA:XLB) was up 2.4%. The materials stocks are involved in the discovery, production, and processing of both raw and synthetic materials.

XLB fell sharply lower in 2008, losing over 45%...but the gains in 2009 and 2010, of 40% and 16% respectively, erased those losses. So far this year, the XLB is up just over 12% (after losing 12.8% in 2011), as opposed to the small 0.2% loss in the Spyder Trust.

The two energy ETFs I favored last week, SPDR S&P Oil & Gas Exploration (NYSEARCA:XOP) and Select Sector SPDR Energy (NYSEARCA:XLE), gained 1.9% and 1.6% respectively. They still need to surpass further resistance to confirm that their correction is over.

For those underinvested in stocks, the Select Sector SPDR Materials ETF looks attractive, as do these two chemical companies and one oil driller that also appear to have completed their corrections.


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Chart Analysis: The Select Sector SPDR Materials has tested the 38.2% Fibonacci retracement support of the rally from the June lows at $32.59. The Fibonacci levels can be a great tool to determine both entry and exit points.

Dow Chemical (NYSE:DOW) is up just 4% this year, and has lagged the SPY by well over 13% so far in 2012. The daily chart shows a pattern of lower lows (line f) since last May.


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Cabot (NYSE:CBT) is a much smaller, $2.4 billion specialty chemical company that peaked in May at $44.97, and came close to the 50% Fibonacci retracement support at $33.65 in September.

Nabors Industries (NYSE:NBR) is a $4.3 billion dollar oil and gas land drilling company that peaked in February at $22.73 but then dropped sharply to a low of $12.51 in June.

What It Means: In the next week or so, we should have further evidence to tell us that the materials stocks have bottomed. The strong gains Tuesday create an initial buy level near the middle of Tuesday’s range, with an additional entry at the last week’s lows.

The XLB looks like a good risk-reward purchase for those with low exposure to equities, while the three stocks have a larger risk but also the potential for a better return.

How to Profit: For the Select Sector SPDR Materials, go 50% long at $37.26 and 50% long at $36.84, with a stop at $35.37 (risk of approx. 4.5%).

For Dow Chemical, go 50% long at $29.44 and 50% long at $28.84, with a stop at $27.76 (risk of approx. 4.7%).

For Cabot, go 50% long at $37.08 and 50% long at $36.66, with a stop at $35.42 (risk of approx. 3.7%).

For Nabors Industries, go 50% long at $14.52 and 50% long at $14.14, with a stop at $13.36 (risk of approx. 6.7%).


Editor's Note: This article was written by Tom Aspray of Moneyshow.

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