CHEMICALS LEAD BASIC MATERIALS HIGHER -- DOW AND EASTMAN CHEMICAL ARE GROUP LEADERS

MATERIALS SECTOR SPDR NEARS UPSIDE BREAKOUT... One of the market's strongest sectors is basic materials. Chart 1 shows the Materials Select Sector SPDR close to breaking through its April/July peaks. That would be an impressive breakout if it occurs and would put the ETF at the highest level in five months. Its relative strength line has been rising since early May. Yesterday I showed Hercules hitting a two-year high and mentioned that chemicals were leading basic materials higher. That's the case again today. This week's heavy buying of chemicals may be due to the sharp drop in oil. Chemicals are heavy users of that commodity.

Chart 1

CHEMICAL INDEX NEARS 2004 HIGH ... Chart 2 shows the Dow Jones US Chemicals Index moving up to challenge its 2004 peaks. Its relative strength line has already hit a new high. This is where most of the basic material strength is coming from. That's because chemicals are heavily weighted in the group. And because the stocks are rising sharply. The two biggest stocks in the Materials SPDR shown in chart 1 are DuPont and Dow Chemical -- both chemical stocks that have a combined weight of 26%. While both stocks are rising, DOW is the big winner.

Chart 2

DOW CHEMICAL HITS SIX-MONTH HIGH... The daily bars in Chart 3 show Dow Chemical in the process of breaking through its April high on rising volume. Its relative strength line looks even stronger. To put this week's bullish breakout in better perspective, take a look at the monthly bars in Chart 4. They show that DOW is also nearing a challenge of its 2004 and 2000 highs at 44. A close through that major resistance barrier would be a new all-time. Eastman Chemical is another group leader.

Chart 3

Chart 4

EASTMAN CHEMICAL NEARS UPSIDE BREAKOUT ... The daily bars in Chart 5 show Eastman Chemical on the verge of breaking through its June high at 47. Its relative strength line has already broken out. Although prices look high on the daily chart, they don't on the monthly chart. That's why it's always a good idea to consult long-term charts for better historical perspective. The monthly bars in Chart 6 show that EMN is still in the lower end of its seven-year trend and is nearing a challenge of its early 2002 peak near 48. The stock has already broken its major down trendline and its relative strength is turning up. A close above 48 would put the chemical stock at the highest level in three years and in a major new uptrend.

Chart 5

Chart 6

ANOTHER MATERIAL ETF NEARS BREAKOUT... Chart 7 ahows the AMEX Basic Materials iShares also close to a bullish breakout. The chart looks similar to the Materials SPDR shown in Chart 1. Chemicals are by far the largest group in this ETF (57%) compared to 24% in Mining and Metals and 18% in Paper & Forest Products. It seems clear that the chemicals are the driving force right now in basic materials.

Chart 7