One of the primary tenets of technical analysis is the idea that uptrends consist of a series of higher highs and higher lows, while conversely, a downtrend is defined as a series of lower highs and lower lows. Active traders who try to capitalize on trend reversals will scour the market for scenarios in which there is a recognizable change in the price structure.
More specifically, in the case of an uptrend, traders will watch for where a series of higher highs and higher lows reverses into a downtrend by changing to a series of lower highs and lower lows. In the case of a downtrend, traders will watch for scenarios where the price structure changes to a series of higher highs and higher lows. In this article, we use these basics of trend analysis to take a look at the state of agriculture, which appears to be in the early stages of a newly defined uptrend. (To learn more about trend reversals, check out: Retracement or Reversal: Know the Difference.)
One of the most popular exchange-traded funds used by active traders for gaining exposure to agriculture is the PowerShares DB Agriculture Fund. In case you aren't familiar, this fund follows a rule-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities such as wheat, corn, soybeans, cocoa, live cattle, sugar and coffee.
Taking a look at the chart below, you can see that the price has recently notched a higher lower and is trading near an interesting level of short-term resistance, as shown by the dotted trendlines. Recent price action combined with the bullish crossover between the moving average convergence divergence (MACD) and its signal line (blue circle) suggest that the bulls are in control, and this traditional buy sign could act as a catalyst for upside momentum over the days and weeks to come. Active traders will likely set their target prices near the March highs and protect against a sudden sell-off by placing stop-losses below $18.60. (For further reading, see: 3 Charts That Suggest Now Is the Time to Invest in Agriculture.)
With a weighting of nearly 14%, wheat futures make up the largest component of the DBA fund. Active traders who look for a purer way to trade wheat often look to exchange-traded products such as the Teucrium Wheat Fund (WEAT). As you can see from the chart, the trend reversal pattern looks nearly identical to that shown on DBA above. The established swing low near $6 creates a clear line in the sand for traders looking for where to place their buy and stop orders. The current risk-to-reward ratio due to the pullback in recent sessions is creating a lucrative entry point, and the crossover between the MACD and its signal line suggests that we could see a bounce higher over the coming weeks. (For more, see: Trend Following Tips for ETF Investors.)
The bullish trend reversal under way in the soybean market is further along than wheat and most other soft commodities. Taking a look at the chart of the Teucrium Soybean Fund (SOYB), you can see that the bulls were able to push the price above the long-term resistance of its 200-day moving average (red line). The shift in direction of this long-term moving average is one clear sign that the momentum is changing, and the recent bounce suggests that this level will now likely be used as a key area of support. Active traders will likely look to buy as close to the dotted trendline or 200-day moving average as possible in an attempt to maximize the risk/reward. Again, the bullish crossover between the MACD and its signal line could be used as a catalyst for a move higher over the coming days. (For further reading, see: Introduction to Swing Trading.)
The Bottom Line
Spotting trend reversals is one of the primary goals of many traders, and long-term shifts in major segments such as agriculture don't come around very often. A shift in price structure of the ETFs discussed above suggests that there is a fundamental shift under way, and most traders will look to get positioned to profit from the move. Based on the nearby support levels, it wouldn't be surprising to see active traders buy near current levels to maximize the risk/reward setup. Stop-loss orders will likely be placed below the identified swing lows, which if broken would signal a resumption of the downtrend. (For more, see: Keep It Simple and Trade With the Trend.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.