With summer well behind us, it may seem counterintuitive that active traders are now starting to shift their focus to agriculture commodities. As we'll discuss below, rising prices during the final months of the growing season have triggered bullish crossovers between major moving averages on many charts. The common technical buy signal is often used to identify early stages of a major of a long-term uptrend, so this sector could be of specific interest over the final months of 2020.
- Agriculture stocks are usually the main focus of active traders during summer months. However, recent price action suggests that this could be the sector to watch during the final months of 2020 and the first several months of 2021.
- Nearby support levels on charts across the agriculture sector suggest that the risk/reward is in the favor of the bulls.
Invesco DB Agriculture Fund (DBA)
In recent times, many active traders interested in niche market segments such as agriculture commodities often turn to exchange-traded products such as the Invesco DB Agriculture Fund (DBA) instead of the futures market. Looking at the chart below, you can see that the price action since early September is clearly in favor of the bulls. The break beyond the resistance of the 200-day moving average and subsequent crossover between the long-term moving averages, as shown by the blue circle, is being used by many to mark the early stages of a major uptrend.
Due to the lucrative risk/reward setup at current levels, we'd expect many followers of technical analysis to place buy orders as close to current levels as possible and protect against a sudden shift in market sentiment by placing stop-loss orders below the lower trendline or the 200-day moving average, depending on risk tolerance and investment horizon.
Teucrium Corn Fund (CORN)
As one of the top holdings of the DBA ETF, corn prices are of often the focus of many traders when it comes to agriculture commodities. Looking at the chart of the Teucruim Corn Fund (CORN), you can see from the chart that the initial resistance from the 200-day moving average was overtaken in September, and the bulls have not really looked back.
The strong move in recent weeks has also triggered a bullish crossover between the 50-day and 200-day moving averages, which will be used by many active traders to mark the beginning of a major move higher. From a risk-management perspective, stop-loss orders will most likely be placed below the dotted trendline or $12.85, depending on risk tolerance and outlook.
Teucrium Wheat Fund (WEAT)
With a weighting of 15.28%, exposure to spot wheat prices represents the top holding of the DBA ETF. Looking at the chart of the Teucrium Wheat Fund (WEAT) below, you can see that the move above the 200-day moving average and bounce higher clearly shows that the bulls are in control of the momentum.
Based on this pattern, some traders may use the recent weakness as an opportunity to look for an entry price near the newly formed support of the dotted trendline at $5.80. Traders will also want to take note of the recent crossover between the long-term moving averages because it suggests that a long-term uptrend could just be getting underway.
Agriculture is one of the oldest industries in the world, so it is not a big surprise that there are a number of different ways to approach investing in it. Although futures, stocks, and exchange-traded funds (ETFs) are the main entry point into the agriculture sector for most investors, there are alternatives that are either more speculative or more capital intensive (or both). These include exchange-traded notes, investing in farmland directly or through real estate investment trusts (REITs), entering share cropping partnerships with producers, and so on. The maturity of the ag sector and the diverse means of investing in it, combined with new concerns over worldwide food consumption, make it a compelling option for many investors.
The Bottom Line
Agriculture commodities have risen in prominence in recent weeks, which for many may seem like it is weeks late. However, based on the charts discussed above, it is clear that active traders will be betting on a move higher over the final months of 2020.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.