So far, 2017 has proven to be a year that rewards commodity traders who have chosen to trade selectively in certain segments such as precious metals over the past several weeks. It probably comes as little surprise that the broad market has been dominated by sideways momentum, and many groups such as the softs have been dominated by the bears. However, based on the charts discussed in this article, it appears as though the broad commodities market is now in the early stages of breaking higher. The final months of 2017 could be the best opportunity of the year for adding broad commodity exposure.
There are thousands of chart patterns and indicators that are used by active traders for determining the future direction of a market. One of the most reliable and sought-out patterns is the inverse head-and-shoulders pattern, which is a reversal pattern that is generally used to identify major reversals in downtrends. The break above the neckline, such as the one shown on the chart of DBC, is the signal that traders use as confirmation that the trend has reversed and is likely to head higher.
As you can see from the chart, the recent bounce off of the 50-day moving average was strong enough for the bulls to establish control, and the recent move above the combined resistance of the 200-day moving average and neckline suggests that the final months of 2017 could be the time to invest in commodities. Target prices will likely be set around $16.50, which is equal to the entry point plus the height of the pattern. (For more, see: Commodity Traders Gearing Up for a Long-Term Move Higher.)
Agriculture traders have been hit hard by falling wheat prices over the past couple of months, which is evident in the sharp decline shown on the chart of the Teucrium Weat Fund (WEAT). While several fundamental factors are working against agriculture commodities, it appears as though certain commodities such as wheat may actually be oversold and could be prime candidates for a substantial bounce higher.
Taking a look at the chart below, you can see that the sell-off has recently pushed the relative strength index (RSI) below 30. Oversold levels on the RSI tend to last for longer than many active traders anticipate, so it is a common strategy to wait on the sidelines until the indicator crosses above the threshold and moves higher. Generally speaking, traders will look to other indicators such as the moving average convergence divergence (MACD) to also cross above its signal line so they can confirm that the momentum is actually in control of the bulls. This chart is a textbook example of what traders look for when trading a bounce, and most will likely set tight stop-losses below the recent low in case the fundamentals continue to trigger a sell-off. (For further reading, see: Agriculture ETFs Cultivate Bullish Chart Patterns.)
As mentioned above, precious metals have experienced a strong influx of interest from commodity traders in recent weeks, and one of the charts in this area that is now popping up on watchists is that of the iShares Silver Trust (SLV). For those who follow the charts, silver and other metals have recently been able to surpass key resistance levels, and closes above the dotted trendlines are a clear example of the domination of the bulls. Active traders would expect the buying pressure to continue for weeks or months to come, and most will likely set stop-losses below $15.73 in case of a sudden reversal. (For further reading, see: 3 Positive Chart Patterns for Precious Metals.)
The Bottom Line
Trading commodities in recent months has been profitable only for those who have been willing to selectively place their bets in niche sectors such as energy or precious metals. However, a bullish close above the neckline of a broad-based commodity fund suggests that the market is poised for a move higher, and a sampling from agriculture and metals suggests that there is plenty of upside remaining. (For more, see: 4 ETFs for Trading the Surge in Commodities.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.