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Any trader not hiding under a rock this past week has noticed the steep breakout in U.S. and European stocks since Friday, and the rotation from defensive sectors like utilities, health care and consumer staples, into the more cyclically exposed ones.
Whether this rotation is something that will last for more than a few days remains to be seen, but price action thus far makes me a believer, at least as it pertains to the coming weeks.
Among those sectors breaking higher Friday was basic materials, as evidenced by the chart of the Materials Select Sector SPDR (NYSE: XLB) below. The sector, which just two-and-a-half weeks ago looked like a horror show, has since staged a major bullish reversal.
The rally continued this week, not only pushing XLB to fresh 52-week highs, but also past a multi-year resistance line that dates back to April 2011.
Within the basic materials sector, chemical stocks have displayed a dramatic upside turnaround in recent weeks. This is the case not only stateside but also in Europe, where chemicals lagged the broader tape all year, but then quickly began moving higher in mid-April.
Having noticed this rotation to the chemicals stocks, I began searching for a name that has yet to break out and came across Huntsman Corp. (NYSE: HUN). Some of the company's peers, such as DuPont (NYSE: DD), have already broken to new 2013 highs, which increases the likelihood that fund managers will also chase HUN higher in the near future.
As we can see on the multi-year chart below, the stock is at a critical resistance line with connecting points in early 2008, May 2011, and the 2013 highs. A break above the trendline would change the stock's longer-term picture to bullish, and a push past the 2011 highs near $21.50 would result in a major higher high on the weekly chart.
On the daily chart below, things look even more interesting from the long side.
Off the 2012 summer lows, the stock has been rising in a nice, orderly uptrending channel. Within the channel, the stock continued to show periods of consolidation, which then led to new breakouts, each eventually taking the stock to the upper end of its trading channel.
After reaching its 2013 highs in early March, HUN pulled back to the lower end of the range, and then bounced from there in the second half of April.
At present, the stock is once again at a critical diagonal resistance line, that if broken to the upside, could quickly lift the stock back to its 2013 highs near $19.50. This time around, however, a break past the resistance line would also take HUN through the aforementioned multi-year resistance, thus giving the stock a chance to move meaningfully higher.
Recommended Trade Setup:
-- Buy HUN on a daily close above $19.15-- Set stop-loss at $18.50-- Set initial price target at $20 for a potential 4% gain in 4-8 weeks-- Set secondary price target at $21.50 for a potential 12% gain in 4-8 weeks
A recent breakout sets shares up for a rally to last year's highs and possibly beyond.
The charts are telling us stocks are vulnerable to a near-term decline, which could be your next buying opportunity.
This sector is one of the few showing real growth, and there is an undeniable upside catalyst on the horizon.