Commodity ETF Outlook

By Cory Mitchell | September 02, 2014 AAA

Gold, silver, oil and natural gas are some of the most heavily traded commodity ETFs. Three of these commodities are at major inflection points which could determine if the downtrend continues, or the ETF forms a base strong enough to push the commodity higher. Another ETF has already reversed course, and likely has further to rally, but major resistance isn't far off. Certain price levels and overall price action provide early indicators as to where these ETFs are likely to go next.

SPDR Gold Shares (ARCA:GLD) has been in a downtrend since mid-2011, and is currently bumping up against a support level. $114.46 is the recently low, very close to the June low of $114.68. Given the long-term downtrend, this support area is likely to break over the next couple months, with a target of $95. In the short-term though, the price may bounce off the support zone into trend line resistance near $125 and $130. Both these prices provide shorting opportunities, unless the rally to $130 is very aggressive. A very strong and sharp move off support to $130 (or above), followed by a pullback which stays above support, indicates another push higher into the $135 to $140 region. A move beyond $140 signals a longer-term change in direction.

iShares Silver Trust (ARCA:SLV) is consolidating just above support at $17.75 to $18.25. Given the downtrend since mid-2011, the expectation is that support will be broken over the next couple months, with a target of $13. In the short-term, a rally above $20 signals a move into the $21 to $21.50 area. A price move above $22 (preferably aggressive), followed by a pullback that stays above $18, gives some hope to the bulls, providing an opportunity to buy as the price is likely to test $24. A move above $24 points to a longer-term change in direction.

United States Oil (ARCA:USO) has seen a very sharp decline since the last trading days of 2013. Overall the trend is down, so after a December rally the price is resuming the downtrend. Support is at $33, but isn't expected to hold given the overall structure. Stronger support is below, at $31. Over the last two and half years the oil ETF has been moving within a contracting overall range. A drop below support at $31 pushes the price toward $29, which is the low and longer-term support. While less probable, a rally back above $36 should trigger additional buying into $39 to $40, which is trendlne resistance and a recent high.

United States Natural Gas (ARCA:UNG) saw a sharp rally in November and December, and is currently consolidating between $22 and $20.50. An upside move is likely to follow the consolidation, given the strong prior rally. A move above $22.20 confirms this, but $21.50 can also be used an early entry point, with a stop below $20.50. A drop much below $20.50 strips the bullish bias. Since late 2012 the price has been moving back and forth between $17.75 and $23, occasionally and briefly over-shooting the range. Based on this, the upside target is between $23 and $24 (more toward $24). While a break below $20.50 is likely to find support between $18 and $17.

The Bottom Line

Commodity ETFs are an investment alternative, but traders and investors should know that price gaps are common, which may result in larger risk or losses than anticipated. Trade in the direction of the trend, preferably waiting for a pullback to attain advantageous pricing. Gold, silver and oil are all in overall downtrends, with the expectation for further drops. Although strong rallies in these commodities over the coming months could indicate a bottom has been put in. Natural gas in an uptrend, but within a longer-term range, therefore, both upside and downside expectations must be tempered to accommodate this longer-term price structure.

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