Put Pedal to the Metals With Allegheny, Carpenter Tech

The market took a hard hit Friday on Google's (GOOG Quote), and more importantly, Caterpillar's (CAT Quote) earnings misses. What stood out to us about the Caterpillar news was the fact that sales were strong, but raw-material costs rose substantially. This suggested to us that demand for metals by the industrial sector remains high.

Combine the Caterpillar news with the strong 12% GDP number coming out of China, and the demand picture for metal continues to look strong. The metals stocks have acted as one of the core leadership sectors in this rally, and they are holding up very well on a relative basis. The relative strength really stands out, since we would have expected profit-taking and defensive selling in Friday's broad-based selloff.

In our experience, it's usually a bullish sign when a sector holds up and shows relative strength under these types of market conditions. Traders are showing reluctance to part with their metal positions, in spite of the selloff, which usually means the underlying story is compelling.

Metal Sector Breadth

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Breadth for the metal sector has just recently made another new high and is moving along within the context of a well-formed uptrend channel. The steady rise in breadth tells us that liquidity is flowing into the group, which creates a "buoyant" environment for the stocks in the sector. The strong "internals" for the group confirm that the bull market in these stocks may have some more legs to it.

A couple of names to look at in the metal sector are Carpenter Tech (CRS Quote) and Allegheny Technology (ATI Quote).

Carpenter Technology

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Carpenter Technology manufactures and distributes specialty alloys used in industrial and aerospace applications. The stock has just broken out of a large consolidation formation in the weekly chart, and it's now challenging the highs set in early 2006. The breakout from the weekly consolidation pattern signals that the bulls have taken control of this stock, and CRS is back on the offensive. Look for Carpenter to reassert the long-term uptrend and build out another leg to the upside in the coming months.

Allegheny Technologies

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Allegheny Tech is also a metal company that supplies specialty metals to the aerospace, chemical and energy sectors among others. ATI has been trending steadily higher in the weekly chart, but has formed a bullish pullback and consolidation in the daily price action. The stock has recently broken to the upside of the daily pullback channel, and it appears the stock is gaining some upside energy here.

Traders should consider this stock as a long buy, especially if ATI takes out the previous highs at $120.

The metal stocks are surprisingly strong this week and it may signal the group is ready to push higher once the market weakness dissipates.