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How much will overbought Materials Select Sector SPDR (XLB) Fall?

Published June 3, 2017
9:43 PM

The Materials Sector SPDR Fund (XLB) has been in a bull trend since the end of the financial crisis. The trend has narrowed but remains upright since December 2016. The fund has been in a more specific trend channel since February and has created firm support and resistance levels. The fund is currently at that resistance level. Below I have laid out the reasons and levels to which the fund may dip will it continue its overall bull trend.




When we take a look at technical indicators, the relative strength index (RSI) is at 64.9868. RSI tends to determine trends, overbought and oversold levels as well as likelihood of price swings. I personally use anything above 75 as overbought and anything under 25 as oversold. Currently the RSI is below overbought levels, however, the RSI has developed a resistance point of its own. The RSI has been reaching lower highs since December 2016 and is once again at this key resistance point. If the RSI begins to retreat, the fund should follow suit.

The true strength index (TSI) is currently 4.4168. The TSI determines overbought/oversold levels and/or current trend. I solely use this as an indicator of trend as overbought and oversold levels vary. The TSI is double smoothed in its calculation and is a great indicator of upward and downward movement. Like the RSI, the TSI has created relative resistance since December. This indicator is about to hit that threshold. Failure to substantially break above this resistance, the fund should drop in the near-term.

The positive vortex indicator (VI) is at 1.1174 and the negative is at 0.7410. When the positive level is higher than 1 and higher than the negative indicator, the overall price action is moving upward. When the negative level is higher than 1 and higher than the positive indicator, the overall price action is moving downward. These indicators have been in a relatively tight trend since mid-February. When the positive VI was last at its current level, the fund tapered down which ultimately led to a drop to the fund's support line (dotted pinkish-purple on the chart).

The stochastic oscillator K value is 92.2124 and D value is 87.3198. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the stock is trending up. When the D value is higher that the K value the stock is trending down. The stochastic is currently overbought, but the D value has not overtaken the K value, meaning the fund could produce gains for a few more days before ultimately turning downward.

The last three times the fund hit its resistance, it did manage to drop down to its support level in less than 12 days. The first drop was in January over 9 trading days and it resulted in a 3.62% decline. March saw a 3.41% decline over then following 6 trading days while April had a 2.91% drop over 11 days. These timeframes and declines could be blueprints for the current bounce off of the resistance level.

Considering the RSI, TSI, VI and stochastic levels, the overall direction favors a move to the downside. Based on historical movement compared to current levels and the current position, the fund could drop at least 2% over the next 23 trading days if not sooner.

DISCLOSURE: I currently do not have positions in the stock mentioned above. I do not plan to initiate a position within the next 72 hours. Historical movements and technical indicators should never be the sole basis for entering positions involving risk. Make sure appropriate research is conducted prior to taking any risk in a marketplace.

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