The Materials Sector of the S&P/ASX 200 (ASX:XMJ) has experienced a strong correction over the last 2 months, between May 23 and July 25.
Between the high of May and the low of July, the XMJ index declined by more than 24%. Currently the index is trading on the edge. The next few weeks should deliver clues regarding the future direction of the global equity markets.
Today the RBA is expected to leave interest rates on hold, despite signs the economy is slowing. But if it gives any clues as to an interest rate cut, investors may soon be running to their brokers.
In other words, it’d be bullish for shares. And the market could very well favour the Materials Sector.
That wouldn’t mean much to us…but the charts show the index is ready for a bounce. Have a look at a weekly chart.
The price action has reached the long-term support line. That’s academic. This support line has been tested and validated several times (points B, C and D).
Let’s switch to a daily short-term chart now.
The technical indicators argue for a bounce back…and hey… it has probably already started.
Between July 25 and July 31, the price action rebounded to the 23.6% retracement ratio (point H on the chart) of the downtrend occurred between G and D. Point H acted as an initial intermediary resistance, but it should be cleared soon. The near-term oscillators and momentum tools have just triggered bullish signals.
The 9-day MACD and the 20-day Stochastic Momentum Index have each bottomed on very low levels (similar to those when the Index price fell in last January, point C on the chart). They’re now curving upward and crossing above their signal lines.
A further rebound is likely to occur then. In this scenario, the 50% retracement ratio of the previous move may be the main target. It would drive the XMJ to 15,300 points. Yesterday it closed at 13,524 points.
On the downside, the long-term support currently stands around 13,300 points. Only a break of this support would cancel the rebound scenario and would be a new clear bearish signal.
