Market Status with Materials and Healthcare

May 11, 2008: 11:24 AM CST

Happy Mother’s Day!  Let’s take a quick view at the Dow Jones Index, along with two key sectors which I’ll put in focus today – Materials and Healthcare.

First, the Dow Jones ($INDU):

The market failed at the resistance provided by the (now) falling 200 day moving average, and from prior support at the 13,000 level (which also serves as a sort of ’round number’ psychological resistance.

There is obvious support beneath the market, via the 50 period moving average along with the rising trendline drawn since March.  Whether or not the market holds at these levels is the question, but I would guess that the support zones ‘appear’ on the surface to be stronger than the resistance levels, but the market often behaves in ways against the obvious solution.

Breaking 12,500 on the Dow could set up a retest of the lows at 11,700, but a clean break above 13,200 could set up an eventual retest of the 13,600 or perhaps 14,000 level.  Trading at these levels will generate a good deal of media coverage, because there still are plenty of expectations that the market will (or should) be headed lower.

Let’s focus on two sectors now:

The Materials Sector (XLB), which has done very well this year, but could be forming a Head and Shoulders Pattern.

Notice the key momentum divergence that has occurred as price cautiously probes new highs.  The rounded swing action has formed a potential ‘slanted’ head and shoulders pattern.  A break of the neckline, via the ‘measuring rule,’ could take price down to the $40 level which would coincide with the rising 200 day moving average.

Unsurprisingly, Materials stocks have been doing well lately, including Alcoa (AA) and US Steel (X).

Let’s look at the worst performing sector of the year – the Health Care sector (XLV);

The highest price of the year was formed around January 14th with the low being in mid-March.

A rectangle consolidation (continuation) pattern formed throughout February and met its measuring objective (which I also wanted to highlight) on the chart.

It could also be considered a ‘measured move’ via a type of horizontal strange (flat) flag style pattern, where the measured move is equal to the ‘pole’ or price action preceding the consolidation.

Price is now struggling to overcome key moving average resistance, but the worst could be over for this sector (provided it does not break beneath the $30 level on to new lows).

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