Commodity-related companies provide investors and traders some of the best exposure to economic growth, above-average long-term returns, along with lower-than-average risk and a natural hedge against inflation. We’ll take a look at some of the strategies to track and trade some exchange-traded funds and exchange-traded notes that are used to follow commodities such as coffee, oil and gold. (For more, check out An Overview Of Commodities Trading.)
As mentioned in a previous article, coffee has been one of the greatest investments so far in 2014. As you can see from the chart below, the iPath Dow Jones-AIG Coffee Total Return Sub-Index (JO) has risen an astonishing 52.67% so far this year. From a technical perspective, notice how the recent pullback from its swing high of $42.87 stopped near the long-term support of its 200-day moving average. This long-term average will likely be used by many traders to help them determine where to place their stop-loss orders so that they can maximize the risk/reward of the trade. To help the bullish case for coffee traders, the recent crossover shown on the MACD indicator suggests that the next stop could be back toward the mid $40s. (For more, check out Calculating Risk and Reward)
Recent articles have suggested that higher prices have recently become the reality because of conflict in the Middle East. As you can see from the chart of the iPath S&P GSCI Crude Oil Total Return Index (OIL), the price has started to pullback from its recent high and appears to be on route to test the support of its 200-day moving average. As was the case for coffee traders, most oil traders will also be looking to enter a trade as close to the 200 DMA as possible because this will maximize the risk/reward ratio for the position. Taking a look at the RSI and the MACD indicators would also suggest that there may be some more short-term selling pressure before the uptrend is able to resume. Trading signals will be generated when the two indicators create a bottom and move above the key trigger lines. In the case of the RSI, traders will want to see a move below 30 and then want to enter a long position when it crosses back above. For the MACD, a buy signal will be generated when the MACD indicator crosses above its trigger line (red line) in the upward direction.
Gold has been on the rise over the past few weeks and the recent move shown in the chart of the SPDR Gold Trust ETF (GLD) suggests that we could see a move even higher. As was the case in the previous examples, it is interesting to see how the price action has been respecting the support of its 200-day moving average. Conflict in the Middle East, economic uncertainty and a built in inflation hedge makes GLD a very interesting pick for any active trader.
The Bottom Line
Based on the ETFs charts shown above for coffee, oil and gold, it appears that the commodity complex is nearing a key level of support. It is important for active traders to keep a close eye on the 200-day moving average along with key technical indicators such as the MACD and RSI. Bullish signals near these levels will maximize the risk/reward of any given trade and based on the charts; this could be the time to take a position in any of the commodities mentioned. (For more, see Interpreting Support And Resistance Zones)