Falling markets are almost always faster than rising markets. It means that the “panic” generated by the bears is much more powerful than the “exuberance” generated by the bulls.
The Materials (ASX:XMJ) sector of the ASX is a perfect example of this rule. Remember that the GICS Materials Sector encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, steel producers, forest products and related packaging products, and metals, minerals and mining stocks.
Last Friday the XMJ almost hit the level of 9,000 points (intraday low at 9,013) when it was trading above 17,000 last May (historical high posted on May 19 at 17,380). It means that the index declined by almost 8,380 points (48% decline) in less than 5 months (between points B and C). It did exactly the same distance on the other way, from 9,000 points to 17,380 points (therefore a 93% rise) in more than 2 years and a half (between points A and B).
Point A is a previous high posted in September 2005 and which had been cleared on the upside a few months later. The price action never came back to this level until…last Friday. It means that this long-term gap is filled and that it is typically a basis for a move on the other side.
Yesterday the XMJ index closed at 9,700 points. A further rebound is expected and a significant retracement of the recent decline is probable.
The sector has been hammered recently and the bounce back may be impressive too if investors decide to come back massively into the sector, obviously oversold.
The oscillators have bottomed and are now turning upward. The immediate target for the expected coming rebound is around 11,500 points. It corresponds to the 61.8% Fibonacci retracement level of the fall occurred during the last 3 weeks. It also corresponds to the previous lows of September. This target is 18% above the closing price of yesterday.
On the downside, a break below 9,000 points would be new strong bearish signal.
Good Investing,
Gabriel
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