Most commodity traders had to be very selective in their approaches in 2017 as they struggled to offset strong shifts in supply and demand. One group that seemed to be immune to the selling pressure was the industrial or base metals, partly owing to renewed interest in infrastructure spending. In this article, we take a look at several base metal charts suggesting that the uptrends are likely to continue, and we analyze how technical traders will likely look to position themselves in 2018. (For related reading, check out: Pullback in Base Metals Suggests It Is Time to Buy.)
Traditionally, investing in commodities was left for professional traders due to the need to have access to futures accounts. The level of sophistication required for managing the leverage and obligations associated with futures trading limited access to many investors, but with the rise in popularity of the exchange-traded fund (ETF), the story changed, and it is now possible for all types of investors to gain exposure. One of the most popular funds for those interested in base metals is the PowerShares DB Base Metals Fund. This fund comprises futures contracts on commodities such as copper, zinc and aluminum.
Taking a look at the weekly chart below, you'll notice that the ascending trendline has provided support on each attempted sell-off since the beginning of the uptrend in 2016. The bullish crossover between the 50-week and 200-week moving averages was a clear long-term buy signal. Interestingly, the 50-week moving average has moved in lockstep with the ascending trendline, which strengthens the case for setting stop-loss orders directly below that level. It is also worth noting that the price was trending within a channel pattern for the last several months of the year, and the recent breakout suggests that the price could move higher over the weeks or months ahead. Short-term traders or those who trade the channel pattern will likely want to tighten their stop-loss orders and place them a few percentage points below one of the horizontal trendlines. (See also: Breakouts in Base Metals Suggest It Is Time to Buy.)
Another commodity exchange-traded product that active traders will want to consider for their watchlists is the iPath Bloomberg Copper Subindex Total Return ETN. Taking a look at the weekly chart, you can see that the fund is trading along a similar trendline to the one shown above, but the proximity to the crossover between the two long-term moving averages suggests that the upward momentum is just getting started. The recent close above the horizontal trendline is a technical sign that the bulls are in control and that 2018 could be a good year for holders of the metal. (For more, see: Top 5 Copper Stocks for 2018.)
At this point, it should be unsurprising that the charts of aluminum and zinc also look similar to those shown above. Aluminum was the strongest performer of all base metals in 2017 with a gain of more than 34%. Taking a look at the chart, you can see that the bulls are in clear control of the momentum and that the 50-week moving average is proving to be a key area of support that many will use for determining the placement of their stop orders. (See also: Using Base Metals as an Economic Indicator.)
The Bottom Line
Base metals had a tremendous run in 2017 thanks in part to increased spending in infrastructure. As this effort continues, the fundamentals will likely remain strong and could provide the underlying buying pressure that drives prices higher. From a technical perspective, traders will likely continue to main a bullish outlook on the sector until the prices close below the extremely strong levels of long-term support, which were identified in the charts. (For more on this topic, check out: 3 Base Metal Charts to Watch.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.