When it comes to investing in commodities most traders look to precious metals. However, often overlooked is the group known as the base metals, which includes copper, aluminum and zinc. For those who don’t follow the movement of these metals it's important to understand that they are generally used for industrial purposes such as creating wire, cables, electric motors, packaging, construction and much more. This group does not get nearly the same attention as gold and silver, but you’ll find that prices have been slowly rising over the past few weeks and have increased by 4.15% so far in 2014, as measured by Powershares DB Base Metals ETF (DBB). (For more, see: Investing In The Metals Markets.)
Strong Uptrend In Base Metals
Most active traders use long-term moving average to gauge the direction an asset’s trend. One of the most common buy signals is generated when the 50-day moving average crosses above the 200-day moving average. This bullish crossover is known as the golden cross and it marks the beginning of a long-term uptrend. As you can see from the chart below, the golden cross occurred in early July and strong upward momentum has been the story of the day ever since. As the price nears the support of the influential 50-day moving averages it would not be surprising to see the bulls start to add to their positions. Risk tolerant traders will want to protect their position by placing a stop-loss order below the 200-day moving average, which is currently trading at $16.45. (For more on this topic, see: Moving Average Strategies.)
Aluminum Is The Metal Of Choice
In the same way that there is an ETF for the basket of base metals, its also possible for traders to buy into an exchange traded fund that tracks a specific industrial metal such as aluminum. The iPath DJ-UBS Aluminum Total Return Sub-Index ETF (JJU) was specifically developed to reflect unleveraged returns in aluminum futures contracts. Economic speculation, such as the recent rumor that China will likely continue to stimulate its economy, tends to be the primary driver of base metal prices. Based on the chart, you’ll see that the golden crossover has triggered an increase in trading interest and it would not be surprising to see traders use this information to trader major aluminum producers such as Alcoa Inc. (AA). (For more, see Using Base Metals As An Economic Indicator.)
When it comes to aluminum, Alcoa is the world’s largest producer. As mentioned, recent increases in prices will likely cause money to flow towards the company’s shares. Based on the chart, you’ll see that Alcoa has been trading with an extremely strong uptrend over the past twelve months and increases in the underlying commodity suggest that the trend is likely to continue. Notice how the price has not dropped below its 50-day moving average since the golden crossover in late 2013. This strong support will likely be used when traders look for a level to set their stop-loss orders.
The Bottom Line
When trading metals, the precious ones see the most attention. However, astute traders are now turning their attention to base metals. Many are turning to the Powershares DB Base Metals ETF (DBB). More adventurous traders who want to trade in the strongest component are turning to aluminum and the Aluminum Total Return Sub-Index ETF (JJU). As shown above, rising prices also make an interesting catalyst for miners of the underlying commodities. When it comes to aluminum your focus probably should be on Alcoa. (For more, see: Top Base Metal Plays.)
At the time of writing, Casey Murphy did not own shares of any company or fund mentioned in this article.