During times of heightened market volatility and global uncertainty, investors and active traders tend to shift capital into stable asset classes such as reserve currencies and commodities in areas such as energy, metals and agriculture. For the purposes of this article, we'll take a look at three commodity-related exchange-traded products that look poised to benefit from the sudden bearish shift in sentiment and discuss how traders will likely look to position themselves over the weeks to come. (For more reading, see: Long-Term Traders Are Bullish on Commodities.)
Investors seeking to add exposure to the broad commodity markets generally turn to exchange-traded products such as the PowerShares DB Commodity Tracking Fund. Fundamentally, this fund comprises futures contracts on 14 of the world's most heavily traded and important commodities such as oil, gasoline, gold, corn, soybeans, natural gas, sugar and zinc. Taking a look at the chart below, you can see that the fund is trading along a well-defined ascending trendline, which most traders will expect to continue providing support on attempted pullbacks over the weeks to come. Buy orders will likely be placed near current levels because the nearby support levels are providing lucrative risk-to-reward setups. (For more, see: 3 Charts Suggesting It Is Time to Buy Commodities.)
Traders who would like to take a more active approach to adding exposure to the basket of the 14 commodities referred to above may want to consider the PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio. Rather than tracking a diversified commodity index, the managers of the PDBC fund seek to exceed its performance by applying investment strategies that utilize commodity-linked futures similar to DBC, but the fund also uses other financial exposure to establish its specific allocation. Taking a look at the chart, you can see that the pattern is similar to the one shown on DBC, and most active traders will use the same signals when establishing a position.
Based on the tenets of technical analysis, the group of base metals is probably the strongest-positioned segment due to the proximity to a strong combination of long-term support levels. The PowerShares DB Base Metals Fund, which comprises positions in aluminum, zinc and copper, is currently trading near the combined support of its 200-day moving average and ascending trendline. It is a textbook style example of how these two levels often work together to prop up the price on attempted sell-offs. Recent price action together with the bullish crossover between the moving average convergence divergence (MACD) and its signal line suggest that a bounce is likely in the coming days, and it wouldn't be surprising to see traders set target prices near the swing high at around $20. (For more, see: Pullback in Base Metals Suggests It Is Time to Buy.)
The Bottom Line
There are not many asset classes that were able to counter the recent broad-market sell-off, but commodities as a group look strongly positioned to move higher in this new environment. Nearby trendlines combined with long-term moving averages create strong levels of support and ideal entry points for traders and investors looking to protect capital against a market sell-off. (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.