During times of market uncertainty and increased volatility, it is common for active traders to seek shelter by allocating capital to asset classes such as commodities. Hard and soft commodities are generally held in such esteem because they act as a hedge to inflation, are commonly negatively correlated to other assets classes such as equities and bonds, and carry with them an intrinsic value that limits downside risk.

In this article, we take a closer look at the group of commodities known as the softs, which are those that are grown rather than mined and include goods such as coffee, sugar, wheat and soybeans. Based on the charts, it appears as though it could be still too early to buy at this point, but it will likely prove strategic to put these commodities on your radar because there will likely be a chance to get in at a better entry price in the not too distant future. (For further reading, see: Trading the Soft Commodity Markets.)

iPath Bloomberg Softs Subindex Total Return ETN (JJS)

The soft commodities such as those mentioned above have been trading within an extremely strong downtrend since early 2017. By taking a look at the chart of the iPath Bloomberg Softs Subindex Total Return ETN, the most common exchange-traded product for gaining exposure to this segment, it is clear that the bearish price action suggests that a continued move lower is likely in the cards. Technical traders will use the recent close below the lower support of a channel pattern to predict a continued sell-off, and many will likely set their target prices around $27, which is equal to the entry price minus the height of the pattern. It is also interesting to note how the 200-day moving average (blue line) has recently prevented a move higher, which suggests that the momentum continues to favor the bears. This is another level that traders will want to keep an eye on because a true reversal won't be confirmed until there are several consecutive closes above it. (For more on this topic, check out: Top 4 Agriculture ETFs for 2018.)

Technical chart showing the performance of the iPath Bloomberg Softs Subindex Total Return ETN (JJS)

iPath Bloomberg Sugar Subindex Total Return ETN (SGG)

After seeing the chart of the softs subindex above, it probably won't be a surprise to see that the chart of the iPath Bloomberg Sugar Subindex Total Return ETN is also trading within a significant downtrend, with a pattern that looks nearly identical to the one descried. This chart is a textbook-type example of how active traders use trendlines to predict future price action and for determining the placement of stop-loss orders. Again, like the case above, the downward-sloping 200-day moving average and recent close below the horizontal trendline are likely to be major factors that will lead to increased selling pressure over the weeks to come. (For more on this topic, check out: Commodities That Move the Markets.)

Technical chart showing the performance of the iPath Bloomberg Sugar Subindex Total Return ETN (SGG)

iPath Bloomberg Coffee Subindex Total Return ETN (JO)

One of the most popular chart patterns used for identifying surges in selling pressure is the descending triangle. The clearly identified trendlines are commonly used for placing sell orders, and the breakdown below the horizontal trendline is often used as a sign of a multi-week move lower. As you can see on the chart of the iPath Bloomberg Coffee Subindex Total Return ETN, the recent close below $15 (shown by the red circle) suggests that the bears are in control of the momentum and that the price of the fund could be on its way toward $14. (For more, see: Should You Invest in Agricultural Commodities and Stocks?)

Technical chart showing the performance of the iPath Bloomberg Coffee Subindex Total Return ETN (JO)

The Bottom Line

With the recent rise in market volatility, many active traders are considering shifting capital to other areas of the market. Historically, during periods of uncertainty, soft commodities are generally one of the beneficiaries to the shift in sentiment, but given the chart patterns described above, it appears as though it is too early to bet on a rise. Given the break below key levels of support, most active traders will likely want to remain on the sidelines until there are clear buy signs that confirm a trend reversal. (For further reading, check out: A Primer for Investing in Agriculture.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.

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