Base metals such as zinc, aluminum, and copper are often looked to by active traders as a barometer for infrastructure spending and underlying economic conditions. Trend traders have recently been turning their attention to this segment of the markets because defined patterns are suggesting that the bulls are taking control of the momentum and that we could be in the early stages of a long-term move higher.
Invesco DB Base Metals Fund (DBB)
For followers of technical analysis, moving averages and trendlines are key tools that are used for gauging the overall direction of an asset's underlying trend. Taking a look at the chart of the Invesco DB Base Metals Fund (DBB), you can see that the downtrend that has dominated the price action since early summer has been broken to the upside. The breakout, as shown by the blue circle, will be used by active traders as a sign that the bulls are now in control of the momentum and that the price is likely to head higher from here.
As an added layer of confirmation, some active traders will also want to note the bullish crossover between the moving average convergence divergence (MACD) and its signal line, which could provide enough incentive to bring undecided traders into the sector and push prices higher faster than some are expecting. From a risk-management perspective, stop-loss orders will likely be placed below the dotted trendline to protect against a sudden shift in sentiment or shifts in supply and demand.
SPDR S&P Metals and Mining ETF (XME)
Another key exchange-traded fund (ETF) that is used by active traders for tracking shifts in the metals and mining sector is the SPDR S&P Metals and Mining ETF (XME). While the fund has a broader perspective than just base metals, it is interesting to see how the price is trading within a defined triangle pattern.
Using the moves higher in base metals as noted on the chart of DBB above as a leading indicator, traders will watch for a move toward the upper trendline and eventually beyond to mark the next leg of a major move higher. Buy orders will likely be placed near current levels in anticipation of the move higher, while stop-loss orders will most likely be placed below the recent low or the dotted trendline near $24.75.
Southern Copper Corporation (SCCO)
Looking at the chart of Southern Copper Corporation (SCCO), you can see that the stock is trading within a similar pattern to the ones shown above. The dotted trendlines have defined the trading range over the past several weeks/months, and these levels will likely continue to prove influential over the coming days.
Given the break higher on the chart of DBB, active traders will likely hold an upside bias on Southern Copper stock and watch for a breakout above the nearby trendline to act as a catalyst for a sharp move higher. Based on the height of the pattern, a breakout would likely suggest that traders would set their target prices to the 2019 high and likely beyond.
The Bottom Line
Defined trading ranges will likely make the base metals segment of the markets a favorite among followers of technical analysis. The key trendlines discussed above will likely be used by many for determining the placement of their buy and stop orders. Breakouts above the dotted trendlines over the coming weeks could set the segment up for a sharp move higher heading into 2020.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.