In July, the basic materials stocks started to emerge as market leaders, coming up off of July's lows to gain as much as 7.7 percent by mid-August. That move, however, also pulled the group back above the 200 day lines, and led a lot of investors to think that there was going to be a rally in the sector. That gain, however, has ended up being nothing more than a headfake. These stocks have been under fire for the last two weeks, and this week isn't exactly getting off to a great start either. Now, this group is back under the 200 day moving average, and more than that, is poised to keep moving lower.

For our chart, we'll be using the Dow Jones Basic Materials Index (DJUSBM). All the materials indexes look about the same though. For the Dow Jones index, the problem is obvious - the index has fallen under all the key averages (short-term and long-term), and developed a lot of negative momentum in the process.

However, there's something less clear on this chart as well. The Dow Jones Basic Materials Index is actually in a bullish trading range - see the dashed lines. The highs and lows have turned into support and resistance lines since early May, and have been guiding the index higher, albeit in a zig-zag fashion. So the question from here is whether or not that support line at 186.5 will break. If it does, then we could see this chart fall all the way to our target price of 168....but that all depends on support actually breaking down. If and when it does break, stops on the bearish bias will come with a close back above the 20 day line, currently at 192.

So why do we think this approach towards the support line could be any different than the last two? There are subtle hints all around (hints that are admittedly touchy-feely). For starters, Greenspan now seems genuinely worried about a housing market collapse. And, oil prices just hit all time highs, yet stocks are actually up (as of right now). Even gold has stalled over the last few months. What's that got to do with basic materials? These are all tangibles, or hard goods. All of them typically move as a group, and they're all subject to interest rate and inflation fluctuations. So seeing real estate and oil poised to tumble as inflation is being tamed (and interest rate hikes are slowing down), we have to think something similar is in store for the materials stock. It all depends on that break under support though.

Dow Jones Basic Materials Index (DJUSBM) - Daily

Recent Sector Rotation Trends

A couple of weeks ago we introduced a new sector rotation analysis. The response was overwhelmingly positive, so we'll continue to add the data. Note that we won't be inserting the information every week, as sector rotation take a little longer than that to actually 'spot'. We plan on doing this study at the end of each month, or in mid-month if there's a significant sector-leadership change that needs to be noted. The idea is still the same - to compare sector performance over the last month in relation to the performance over the previous month. This will help us identify new or changing trends, as well as sustained trends.

As for recent rotation, it's difficult to distinguish between changes in leadership and good-old-fashioned bearishness. The only group that is up for the month is the energy sector, with healthcare coming close to breaking even. For the rest, August has been unpleasant - a radical change from what we saw last month. And even healthcare and energy were unimpressive. So, we'll reserve judgment on any rotation, and just wait for the correction to fully play out before we start looking for hot spots again.

Price Headley is the founder and chief analyst of BigTrends.com.