Active traders are consistently on the hunt for well-defined chart patterns within the commodities market because the buy/sell signals that ensue are a clear indicator of a significant shift in the global economic landscape. The extreme spikes in price and volatility in the commodities market also make this a segment that should only be traded by those with an established risk-management strategy. In the article below, we’ll take a look at several chart patterns that are popping up on the watchlists of technical analysis, and we’ll try to determine where prices will be headed in the next few months. (For related reading, see: Active Traders Are Turning Bullish On These Commodities).
PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio
One of the many strategies for trading commodities is to start with analyzing diverse portfolios to get a sense of where the overall market is headed. One popular fund that helps technical traders to achieve this goal is the PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (PDBC). In case you aren’t familiar, the managers of the PDBC fund seek to actively pursue its objective of investing in a portfolio of the world’s most heavily traded commodities by taking positions in commodity-linked futures and other financial instruments. As of December 31, 2016, 59.69% and 20.08% of the fund’s assets were allocated to the energy and agriculture sectors respectively, which we’ll take a look at in more detail later in this article.
Taking a look at the chart below, you can see that the PDBC fund is trading within an ascending triangle pattern. This bullish continuation pattern is popular amongst active traders because a close above the upper trendline is a clear buy signal and is usually followed by a surge in momentum. In this case, active traders will likely set their buy-stop orders above $17.61 and attempt to protect long positions by placing stop-loss orders below the combined support of the 200-day moving average and/or the lower trendline, which are both trading near $16.41. (For more on this topic, check out: Analyzing Chart Patterns: Triangles).
With nearly 60% of the PDBC fund exposed to the energy, it is a natural conclusion for active traders to take a closer look at this group to determine if the odds are in favor of a move to the upside. One of the most popular exchange-traded-funds used by traders to analyze the energy market is the Energy Select Sector SPDR Fund (XLE). Taking a look at the chart below, you can see that the fund is trading within an established uptrend and the proximity to the trendline is creating an interesting buying opportunity based on the risk/reward. Notice how this trendline propped up the price on each attempted pullback since spring 2016. Active traders would expect this behavior to continue and will likely place an order as close to the trendline as possible and protect their long positions by placing stop orders below the 200-day moving average, which is currently trading at $69.58. (For more, see: Active Traders Shift Their Attention to Energy).
With the second-largest portion of the PDBC fund attributed to agriculture, we’ve chosen to take a closer look at the PowerShares DB Agriculture Fund (DBA) to see if this sector will act as a catalyst for higher prices. Taking a look at the chart, you can see that a well-defined base is forming near $20 and the new-found support could be all that is needed to shift the long-term momentum in favor of the bulls. From a risk-management perspective, stop-loss orders will likely be set just below $19.50 to protect against a surprise move lower. (For more, see: Watch Out for Agricultural Stocks).
The Bottom line
The bullish chart patterns appearing on diversified commodity funds such as PDBC have caught the attention of active traders. As discussed above, given the significant exposure to energy and agriculture of the PDBC’s portfolio, we chose to take a look at tracking funds in these areas to see if they are likely to drive prices higher from here. Based on the nearby support of long-term moving averages and key trendlines, it appears as though there will be no shortage of trading opportunities and they will likely benefit those who can spot them for months to come. (For more, see: Commodity Traders Gearing Up for a Long-term Move Higher).
At the time of writing, Casey Murphy did not own any of the assets mentioned.