It is not exactly news that the prices of key agriculture commodities such as wheat and corn have struggled to overcome dominant downtrends over the past couple of years. However, based on the recent price action shown on the charts of key exchange-traded products, it looks as though the story is changing and that prices seem to be poised for a move higher over the coming weeks and months.
In this article, we take a closer look at the patterns and try to determine in more detail how active traders will position themselves so that they can take advantage of what looks to be the best trading opportunity in this space in quite some time.
One of the most popular funds that is used by retail investors for gaining exposure to the agriculture sector is the PowerShares DB Agriculture Fund. In case you aren't familiar, this fund offers investors a cost-effective and convenient way to invest in commodity futures such as wheat, corn, soybeans, cocoa, live cattle, sugar, coffee, lean hogs, feeder cattle and cotton.
From a technical perspective, taking a look at the chart below, you can see that the bears have been in control of the trend for much of the past couple of years, as mentioned earlier. Active traders would have likely been keeping a close eye on the combined resistance of the 200-day moving average (blue line) and the descending trendline (red dotted line). The multitude of failed attempts to move above resistance was a clear indication that the downtrend would be in control of the momentum. Looking at the price action, the recent close above resistance is a technical signal of a trend reversal and is likely being used as a signal that many of the soft commodities are ready to move higher. Traders will now likely hold a bullish outlook on soft commodities, and many will likely use the newfound support near $19 to determine the placement of their stop-loss orders. (For further reading, see: Trade the Rise in Agriculture Commodities.)
With 13.87% of the total net assets of the DBA fund, wheat is one of the soft commodities that seems to be the best choice for further attention on the part of active traders. Taking a look at the chart of the Teucrium Wheat Fund (WEAT), which is the most popular exchange-traded product to track this commodity, the recent break beyond the resistance of its 200-day moving average and influential trendline suggests that the bulls are taking control of the momentum. The surge in volume that followed the break higher is likely to be used as confirmation, and the support near $6.50 is creating one of the strongest risk/reward setups in the market.
Traders who want to gain exposure to corn, which comprises 13.14% of the total net assets of the DBA fund, often turn to the Teucrium Corn Fund (CORN). Taking a look at the chart, you can see that the price has been trading below the long-term resistance of the 200-day moving average for most of the past year, and the trend has been dominated by the bears. The continued buying pressure so far in 2018 has managed to send the price above the key resistance, as shown by the blue circle. This buy signal could trigger a flood of buy orders and will likely be used as a guide for placing stop-loss orders in the future. (For more, see: Active Traders Are Turning to Soft Commodities for Answers)
The Bottom Line
Soft commodities such as corn and wheat have been out of favor with investors for quite some time. However, given the bullish price action on the charts of key soft commodities exchange-traded products, it seems like the trend is reversing. The traders who watch the charts could stand to enter at one of the strongest risk/reward scenarios found anywhere in the public markets.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.