Rally In Basic Resource Stocks May Get Rocky
Basic resource stocks have been on a tear this year – but they are testing major resistance right now.
It’s no secret that resource stocks have been among those benefiting the most during the post-election rally. Using the Dow Jones U.S. Basic Resources Index as a gauge, the space is up about 17% over the past 3 weeks. However, folks should remember that this isn’t just a “Trump Trade”. The fact is, from the January low to the close the day after the election, the Basic Resources Index exactly doubled. So this move has been in the works for most of the year. So what will stop it? Perhaps some good old chart resistance – and a lot of it.
In what form is this chart resistance that we are detecting? On the DJ Basic Resources Index, it includes:
- 23.6% Fibonacci Retracement of 2008-2016 Decline ~168
- 38.2% Fibonacci Retracement of 2011-2016 Decline ~177
- 61.8% Fibonacci Retracement of 2014-2016 Decline ~163
- The Post-2008 Down Trendline (on a log scale), connecting the 2011 High ~178
This confluence of potential resistance represents the stiffest challenge yet for the Basic Resources rally. Each of these potential lines of resistance is noteworthy by itself, let alone having them all clustered in the same vicinity. That fact should make this area particularly tough to penetrate.
As we’ve stated recently in several posts, the cluster of Fibonacci levels is particularly important to us. It not only creates multiple layers of potential resistance, but it serves as a sort of validation of the market junctures that we’ve identified.
So is this potential resistance going to impede the Resources rally? Given the recent boost in construction/industrials/materials, etc., we’ve noted a number of associated indices or funds encountering similar clusters of resistance. Some have been thwarted while some have broken through (for now). So, in our view, the jury is still out regarding the immediate resolution of resource resistance. Thus, while his area should serve to stonewall Basic Resources, at least temporarily, our mind is also open to a brick-busting breakout.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
