Over the past several years, commodity traders have profited from some of the strongest uptrends found anywhere in the public markets. As we'll discuss in this article, the defined levels of support, as measured by ascending trendlines, have provided consistent entry positions for strategic traders looking to gain exposure. In recent weeks, bullish traders seem to have lost some of their conviction, and prices have started to consolidate. The recent introduction of sideways momentum is now dominating the price action and seems to creating clear levels of support and resistance. When broken, these levels will likely define the direction of the next leg of the long-term trend. (For further reading, see: 3 Charts That Suggest It's Time to Buy Commodities.)
When active traders look to gain exposure to a broad basket of the world's most in-demand-commodities, they turn to exchange-traded funds (ETFs) such as the Invesco DB Commodity Index Tracking Fund. As you can see below, the fund traded along a key ascending trendline for the second half of 2017. Based on the chart, traders would have likely continued to expect the uptrend to continue for most of 2018, but the break below the support in early summer was an indication that the momentum was weakening, and you'll find that the fund has been trading in a channel pattern ever since. Active traders will keep a close eye on the dotted trendlines because a close beyond one of the levels will likely be used as a catalyst for a sharper move in the direction of the breakout. Based on the nearby support of the 200-day moving average, we would expect traders to hold an upward bias and most will likely set their stop losses below the psychological $17 in case of a surprise sell-off. Target prices will likely be set near the 2018 swing high of $18.47.
(For more, see: Technical Analysis: Chart Patterns.)
One of the most widely followed chart patterns is known as the flag pattern. In case you aren't familiar, this consolidation pattern is found by identifying securities that are trading within short-term descending channel patterns amid a long-term uptrend. As you can see from the chart of the iShares Commodities Select Strategy ETF, the downward-sloping trendlines have been creating clear levels for placing buy and stop orders, but the recent test of the support of the 200-day moving average suggests that the bulls are still in control and that a breakout beyond the resistance could be a matter of days away. A break above the resistance would lead most active traders to set their short-term target prices near $40 and then likely significantly higher after that should the 2018 high be broken. (For more, see: Analyzing Chart Patterns: Flags and Pennants.)
Another popular consolidation pattern is known as the symmetrical triangle pattern, which you can see is forming on the chart of the Materials Select Sector SPDR Fund. As in the case of the patterns mentioned above, a break beyond one of the defined trendlines would signal a breakout in the direction of the move. Based on the combined support of the long-term moving averages and the lower trendline, we would expect traders to hold a bias to the upside and watch for a close above $60 before betting on a move higher. (For more on this topic, check out: Triangles: A Short Study in Continuation Patterns.)
The Bottom Line
Commodities have been trading within defined uptrends over the past couple of years, but the recent periods of consolidation have some traders concerned above a reversal. Given the analysis discussed above, we would expect traders to keep a close eye on the patterns and hold a bias to the upside due to the nearby support of long-term moving averages. A break above the nearby resistance could lead to a strong finish to 2018 for most commodities. (For more, see: Long-Term Traders Are Bullish on Commodities.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.