There have been many areas of the market that have deserved the attention of active traders in recent weeks, but given the chart patterns on key commodity-related exchange-traded funds (ETFs), it could now be time to look into hard assets such as copper and gold. In this article, we take a look at the chart patterns that are garnering the most interest and analyze how most market players will be looking to trade the move higher. (For further reading on this topic, check out: 3 Charts Pointing to Higher Commodity Prices.)
One of most sought out patterns in technical analysis is known as the inverse head-and-shoulders pattern. This chart pattern is commonly used to signal a major shift in trend and is a clear measure of the conviction of the bulls. As you can see from the chart of the PowerShares DB Commodity Index Tracking Fund, the price was able to break above the neckline of a well-defined pattern, and the recent retracement toward the neckline will likely be used as an entry point for those looking to capture the best possible risk-to-reward ratio.
Based on this pattern, traders will likely set their target prices near $16.40, which is equal to the entry point plus the height of the pattern. For further confirmation, the bulls will likely look to the recent bullish crossover between the 50-day and 200-day moving averages, which is known as the golden cross, because it alone is a signal of a major long-term uptrend. The combination of these two technical buy signals could be enough to trigger a major surge higher over the coming weeks. (For more, see: Commodities Trading: An Overview.)
Copper has been one of the strongest performing commodities since Donald Trump got elected into office. Hopes of increased infrastructure spending and some encouraging economic data have renewed interest in the industrial metal. Taking a look at the chart of the iPath Bloomberg Copper Subindex Total Return ETN, you can see that the fund was able to find support near the horizontal trendline last week.
The bounce and subsequent gap suggest that the bulls are now in clear control of the momentum, and most traders will look at the recent crossover between the moving average convergence divergence (MACD) and its signal line to confirm a move higher. From a risk management perspective, stop-loss orders will likely be set below either the horizontal or ascending trendline, depending on risk tolerance. (See also: Commodity Traders Gearing Up for a Long-Term Move Higher.)
From the perspective of an active trader, the price action of gold over the past several weeks has been one of the most interesting in the public markets. The breakout in early September and the recent pullback suggest that the market is sensitive to downside risk. In the event of increased volatility, gold funds such as the SPDR Gold Shares could be among the charts that offer the most lucrative risk/reward setups.
Traders may use the recent bounce off of the 200-day moving average as a sign that the bulls are in control of the momentum and use it as a reason to place an order. Stops will likely be set below the swing low or the support of the 200-day moving average in case the selling pressure continues. (For more, see: 4 ETFs for Trading the Surge in Commodities.)
The Bottom Line
While there has been much to pay attention to over the past several weeks, the charts of hard assets such as copper and gold are starting to move into a position that is worth noting. Price action near major levels of support and the long-term breakout on the chart of the DBC fund suggest that prices could be headed higher into the end of 2017. (For additional reading, check out: Commodities: The Portfolio Hedge.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own shares of any asset mentioned.