Yesterday the Materials sector (ASX: XMJ) was up 3.53% and closed at 9,141 points.
Two bearish weeks in January (from January 8 to January 23) had previously driven the XMJ index back to 8,000 points.

What happened during the past few weeks?

The bears actually leaded the market since they had succeeded to contain the short-term bullish trend started just before Christmas and ended on January 7: during those bullish sessions, the Materials sector was one of the most important gainers. It rose by 13.6%.

The bearish countertrend then completely corrected this positive trend. On January 23, the XMJ index had fallen even lower than its low of December 23.

So why did the trend reverse on January 7? Well, the index reached on this day its 38.2% Fibonacci retracement ratio (points C on the chart) of the straight decline occurred between September and November (points A and B).


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The 38.2% Fibonacci ratio remains valid and is once again the target for the current price action.

The outlook seems to be positive on the medium-term as the Index failed to fall much lower than 8,000 points in late January. In a previous analysis done a few weeks ago, we were mentioning that the bear configuration was likely to drive back the index towards the low of 2008, around 6,500 points.

This scenario is not yet totally excluded but the recent price development may convince investors that the bear trend is over and that the outlook is on the upside now. Why that? Well, the recent configuration shows that the higher lows are regularly poste since the low of 2008, posted in November (point B). Those higher lows build a support line where bounced the XMJ last week.

From a closing price at 8,278 points on February 4, the index climbed to 9,141 points yesterday, therefore by 10.4%.

This bullish move will test the immediate resistance (the 38.2% Fibonacci ratio level) at 9,400 points. A break above this level would cancel the bearish scenario (back to 6,500points) and would give some fresh momentum on the upside.