Technical Outlook: Consider This TIP

Today we're going to look at the basic materials sector. This group looks like it has put in a short-term and probably an intermediate-term top. We're also going to look at how investors can profit from the increasing inflation pressures that consumers are facing.

The basic material sector broke down hard Wednesday, which was led by the extreme weakness in the steels followed by the coal sector and names such as Arch Coal (ACI Quote) and Peabody Energy (BTU Quote). You can see from the chart below of the Dow Jones U.S. Basic Material Index that it clearly broke below support and its intermediate-term trend on heavy institutional volume.

The signs of weakness started appearing over the last month as buying volume decreased and selling volume, represented by the red bars, increased. You can also see that the institutional money flow started going out of the sector while the price was still moving up, and that is not a good sign.

Going forward, we are likely to see a sharp bounce back up to the previous support level, and that will probably be a good opportunity to take profits in these sectors and stocks. I've been stating that long-term I am very positive on the commodity markets, but I believed they were due for a correction and it certainly looks like that time is upon us.

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Most of my columns have been focused around warning investors to take profits in their holdings and pointing out the increasing risks in the market. However, I always like to make investors aware of possible profit opportunities that exist even in tough markets like this.