Recent selling pressure across the commodities market has sent the prices below key levels of technical support, which has active traders on the lookout for a continued move lower. In this article, we'll take a look at the charts of several popular exchange-traded products that are used as barometers for gauging the future direction of the major commodities markets and key segments. We will also attempt to determine how traders will look to position themselves over the weeks or months ahead and identify any noteworthy trades. (For a quick refresher on this topic, check out: Commodity Investing 101.)
Given the rise in niche exchange-traded funds (ETFs), active traders often turn to the Invesco DB Commodity Index Tracking Fund to get a sense of the overall direction of the broad commodities market. As you may know, the fund comprises futures contracts on 14 of the world's most liquid and important commodities such as lumber, oil, gold, wheat and corn. Taking a look at the chart below, you can see that the price has recently fallen below the combined support of the 200-day moving average and an ascending trendline (shown by the blue circle). The breakdown is a technical indication that the bears are in control of the momentum and that a move lower could be in the cards. From a risk management perspective, stop-loss orders will likely be placed above $17 or the dotted trendline, depending on risk tolerance, in an attempt to maximize the risk/reward. (For further reading, see: Top 3 Commodities ETFs for 2018.)
The timber and forestry segments of the commodities market are often used as a gauge of the overall strength of the economy. When times are good, it should come as no surprise that demand for wood products rises due to increased demand for building products. However, when supply outweighs demand and investors start to question the conviction of the uptrend, then prices tend to fall. Taking a look at the chart of the iShares Global Timber & Forestry ETF, you can see that the price has recently closed below a major ascending trendline. You'll notice that the trendline has consistently provided active traders with lucrative positions for placing buy orders over the years. The recent close below the trendline and subsequent failed test to move back above it now suggest that the trend has reversed and that the bears are in control, even despite the recent bounce, which active traders will expect to run out of steam near the trendline before continuing its longer-term move lower. (For more, check out: 3 Charts That Suggest Agriculture Commodities Could Move Lower.)
Another commodity fund that has recently closed below a major level of support is the United States Oil Fund. As you can see below, the recent close below the trendline, shown by the blue circle, now confirms that the uptrend is in the process of reversing and could be poised for a significant move lower. Based on this chart, it appears as though the 2018 high could be in place and that, by the time we finish the year, the price could be back near where it started in January. (For more on this topic, check out: These 3 ETFs Suggest Commodities Are Headed Lower.)
The Bottom Line
Commodities have experienced a nice run higher for most over the past two years. However, given the closes below key trendlines on major commodity-related ETFs, it appears as though the bears are now in control. It seems as though the best place for the bulls is to wait on the sidelines to see if the prices are able to regain the lost ground and close back above the key levels of new-found resistance.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.