Several commodity ETFs are in, or recently broke out of, charts patterns. Chart patterns provide a way of anticipating the direction of the ETF and how far it might move once a breakout occurs. The varying chart patterns within these ETFs, as well as the assortment of commodities the ETFs represent, present a wide range of trade possibilities to investors and traders.
SEE: The Anatomy Of Trading Breakouts
SPDR Gold Shares (ARCA:GLD) represents the price movement of gold, and up until recently, it was trading in a triangle chart pattern. The pattern began at the end of May as the ETF created a series of slightly lower highs and higher lows. Converging price swings give the appearance of a triangle. A breakout above the formation occurred on August, 21 as the ETF gapped higher. The price target for the breakout is $168 (rounded down). This attained by taking the difference between the original high and low which kick-started the triangle - in late May and early June - and adding it to the breakout price. If the price falls back into the triangle it warns of a potential false breakout. Movement below the triangle, $153,confirms the false breakout and signals more downside to come.
iShares Silver Trust (ARCA:SLV) tracks the price performance of silver. This ETF was also within a triangle, but broke out of it, to upside, in late July. Since that time the ETF has been making higher lows but has been unable to rally - that is until August 20 and 21. On those days the ETF jumped higher, appearing to confirm the short-term upward price trajectory. The pattern is fairly small, so it does not provide much context for the longer-term direction of silver. The target for the upside is $30.42. There is potential resistance along the way at $29.02, the June 6 high. The rising lower line of the triangle has been a well respected trendline since the end of June. If the price moves below that trendline - currently at $26.40 - the rally is likely over and a lower price is likely to ensue.
SEE: Technical Analysis: Support And Resistance
United States Natural Gas (ARCA:UNG) represented the beleaguered price performance of natural gas, which has started a turn-around. After posting a 52-week low of $14.25 in April, the ETF has been rising within a trend channel. The trend channel provides a context for market moves, and moves within the channel are tradable, as well as breakouts. As of August 21, the ETF is moving toward the lower end of the trend channel. This provides buying opportunities, with stops below the lower trendline (currently $15.54). This trade is based on the assumption the trend channel will hold, and the price will begin to rise again. Profits are taken near the top of the channel, currently near $23.10. The upper and lower trendlines are both rising, so price points they intersect with also rise over time. A drop below the lower trendline warns the uptrend is over.
PowerShares DB Agriculture (ARCA:DBA) tracks agricultural commodity performance such as corn, wheat, soy beans and sugar. In mid-June the ETF witnessed a large pick-up in volume - almost unheard of in this market environment of generally depressed volume - and mounted a nice price rally before plateauing in mid-July. The plateau marks a price range, the breakout of which is likely to signal the next major move in the ETF. The range can also be considered a "flag" pattern - with the price rally into it representing a flag pole. For this type of pattern the breakout direction is likely to be higher, but assuming so can be dangerous. The high of the range/flag is $30.44, therefore a move above $30.50 signals an upside breakout. The target based on the range is $31.88, and the flag pattern provides a target of approximately $33.25. A drop below $29 breaks the range to the downside, and could see the price fall toward support at $27.
SEE: How To Trade a Bearish Flag Pattern
The Bottom Line
Chart patterns occur in all stocks and ETFs on different time frames, providing an endless stream of trade ideas and analytical input. Chart pattern aren't profitable all the time though, so risk should always be managed. Ideally, volume should increase when a breakout occurs, if it doesn't, the price target is less likely to be hit. Commodity ETFs provide exposure to assets, which in years past, the average investor would have had little access too. This can be a double-edged sword. Be sure you understand and are aware of the risks commodity ETFs represent before trading them.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.