Commodity traders have benefited from some of the strongest trends in the public markets over the past several years. As you'll read about below, clearly identified levels of support and resistance combined with predictable price action near these levels have made commodity segments such as oil services and agriculture favorite spots to trade. For many, the weakness over the past several weeks has put the chances of a continued move higher on hold, and closes below key levels of support suggest that prices could be gearing up for a move lower heading into 2019.
With the rise in popularity of exchange-traded funds (ETFs), retail investors now have a multitude of options for gaining exposure to nearly any asset class. Those looking to trade movements in the broad commodities market often look to funds such as the Invesco DB Commodity Index Track Fund. It is common for traders to use technical indicators such as trendlines, the moving average convergence divergence (MACD) and the relative strength index (RSI) to gauge the sentiment and trend of the area of interest. As you can see from the chart, in the case of commodities, the recent selling pressure has sent the price below a key dotted trendline, which suggests that the bears are in control of the short-term momentum. Based on the chart, traders will likely watch for the price to move toward the August low by the end of the year.
As discussed, recent weakness in major commodities has dominated the trends on the charts over the past several weeks. At this stage, what is interesting to note is how the weakness in the broad markets has also sent the prices of the services and support subsectors lower. Taking a look at the chart of the VanEck Vectors Oil Services ETF, you can see that the bears have recently sent the price below an extremely significant level of support. It is obvious that the psychological $23 level has acted as a predicable guide for determining the placement of orders over the past several years, but this week's move below (highlighted by the blue circle) suggests that prices could be headed lower into 2019.
The agriculture sector is another area of the commodities market that has recently been struck by significant selling pressure. As you can see from the chart below, the bears have recently pushed the price of the Teucrium Wheat Fund down from its August high, which in turn has triggered a bearish crossover between both the 50-day and 200-day moving averages. This bearish crossover (shown by the blue circle) is a traditional sell signal that is used by active traders to mark the beginning of a long-term downtrend. Bearish traders will likely use the lucrative risk-to-reward ratio at current levels as justification for taking a short position. Stop losses will likely be placed above $6.49 in case of a sudden shift in fundamentals.
The Bottom Line
Commodities have been a favorite asset class for many traders over the past several years because of the defined trends and predictable behavior near major levels of support. The recent breakdowns below key levels discussed above suggest that prices of major commodities could be gearing up for a move lower heading into 2019.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.