During times of heightened volatility, it is a natural reaction of most investors to turn to hard assets such as precious metals and base metals. That has been the case since the North Korean missile tests earlier this month. Much has been written over the past several weeks about rising gold and silver prices, but an interesting trend we will investigate in this article is that attention has turned away from industrial metals such as copper, aluminum and zinc. The recent retracement in the prices of key funds related to base metals suggests that now could be the time to buy. (For related reading, check out: Breakouts in Base Metals Suggest It Is Time to Buy,)
Investors who bought into base metals at any point over the past couple of years have been handsomely rewarded with one of the strongest uptrends found anywhere in the public markets. Taking a look at the chart of DBB, you can see that the combined support of the upward-sloping trendline and the 200-day moving average (red line) have consistently acted as guides for the placement of buy and stop orders. The recent pullback has sent the price of the fund toward another key level of support, the 50-day moving average, which is a level that bullish traders could use as a signal for timing their entry. Most of the bulls will also likely look to place their stop-losses below $16.25. (For more, check out: 4 ETFs for Trading the Surge in Commodities.)
Copper is the most commonly traded industrial metal and is a key beneficiary of the global movement toward increased spending on infrastructure. Taking a look at the chart of JJC, which is one of the most popular investment vehicles used by retail investors for gaining exposure to copper prices, you'll notice that the recent pullback from its summer high has triggered buying interest near a key level of support. Like the case of DBB discussed above, active traders will expect the combined support of the 50-day moving average and dotted trendline to hold over the coming weeks, and many traders will use it as a guide for determining the placement of their buy orders. From a risk management perspective, many traders will likely want to give their position some room to move and as a result will likely set their stops below the 200-day moving average and ascending trendline. (See also: Top 5 Copper Stocks for 2017.)
Aluminum has been on the rise in recent months and is one of the metals that has completely flown under the radar. The upward trend is worth noting and considering for a diversified portfolio because the recent retracement is putting the risk/reward clearly in the favor of the bulls, and traders will likely maintain a bullish outlook until the price of JJU drops below the support near $17.56 or $16.71, depending on risk tolerance. (For related reading, see: Soft Commodities Could Bounce Higher This Week.)
The Bottom Line
Hard commodities have been moving in favor of the bulls since the rise in geopolitical tensions earlier in the month. One group that has fallen off the radar for many of those who are looking for quicker returns is base metals. Based on the recent pullback toward key support levels shown on the charts of the funds above, it appears as though now could be a great time to buy base metals due to clearly defined risk/reward setups. (For more, see: 3 Base Metal Charts to Watch.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.