The strength in the industrial materials group has been one of the cornerstones of this rally. Industrial material and cyclical names have been areas of core strength in this market and "must own" sectors for every portfolio manager.

Within the industrial material group, traders have focused on the performance of the metal and commodity stocks, but we would suggest taking a closer look at the chemical names.

The chemical stocks are starting to pull up the rear in the broader industrial materials sector, as liquidity flows into the group and looks for underexploited names.

Dow Chemical Index

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The chemical stocks have lagged the rest of the industrial materials sector up until last summer because of the cost of crude oil. Oil is the feedstock for the petrochemicals many of these companies produce, and higher fuel prices have obvious implications to the cost structure of these companies. Once oil broke from the 2006 highs, we saw liquidity start to flow toward the chemical sector.

The theme of global basic industrial and infrastructure growth is putting some legs on the sector as well. With the perception that crude oil is relatively tame for now and international demand for basic chemicals is on the upswing, we see these stocks as a great way to play the bull market for industrial materials.

A couple of compelling names in the sector include

DuPont Chemical

(DD) - Get Report


Lyondell Chemical



DuPont has made some interesting long-term changes. DD has formed a large multiyear base formation, which started in 2000. The stock recently broke to the upside of this base, which signals a significant change in the long-term structure of the chart and shows that the bulls are taking control of this issue. The upside breakout in DuPont should be the start of a new primary uptrend.

Lyondell Chemical

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Lyondell is a stock that definitely has the wind at its back. LYO has upside momentum after breaking out over resistance and forming a bullish continuation pattern off of the last move.

This type of bullish consolidation suggests the stock is ready to attempt another push higher and continue the trend. Both of these stocks are good examples of the basic underlying strength that has developed in the chemical sector since last summer.

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At the time of publication, Scott Maragioglio had no positions in the stocks mentioned. Maragioglio had more than 15 years of technical analysis and money management experience before co-founding Epiphany Research. Epiphany Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. He is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Mr. Maragioglio has also served on the board of directors of the AAPTA.