Heightened volatility in the financial markets has many investors concerned about the uptrends of many assets types. We’ll take a look at the charts of key commodity-related products and try to determine if they can withstand the selling pressure. (For more, see: Commodities: Introduction).
The PowerShares DB Commodity Index Tracking Fund
One of the funds of choice amongst active traders for gauging the direction of the broad commodities market is the PowerShares DB Commodity Index Tracking Fund (DBC). In case you aren’t familiar, the managers of the DBC fund seek to track the performance of a diversified commodity index and is comprised of futures contracts on fourteen of the most heavily traded and important physical commodities in the world. This fund is extremely popular and will be rebalanced and reconstituted shortly in November. Taking a look at the chart, you can see that the bulls have managed to send the price above the resistance of the 200-day day moving average. Based on the support that was provided on the pullbacks in August and September, many active traders will likely hold a bullish outlook on the fund and will likely protect their long positions by placing stop-loss orders below $14.02 in an attempt to make the most of the risk/reward setup. (For more on this topic, check out: An Overview of Commodities Trading).
In the futures market, one of the most volatile commodities over the past couple of years has been coffee. As evident by the chart of the iPath Bloomberg Coffee Subindex Total Return ETN (JO), sharp declines in 2015 forced many out of their positions and 2016 has been a year dominated by sideways momentum, which tends to shift the attention to move active commodities such as oil or gold. The bullish crossover of the 50-day and 200-day moving averages earlier this year is a clear signal of the long-term shift in the trend. The sideways momentum is establishing strong areas of support, and the recent selling pressure has triggered one of the most lucrative risk/reward setups in months. Based on this chart, traders will likely look to add a position as close to the 200-day moving average as possible and set their stop-loss just below $20. (For more on this topic, check out: Now Is The Time To Buy Sugar And Coffee).
The chart of silver prices, as measured by the iShares Silver Trust (SLV) is one of the most technically interesting charts in all the public markets. This chart is a text-book style example of how technical traders expect the 200-day moving average to act as support and resistance over time. Notice how the red line acted as resistance for most of 2015 and clearly marked the end of each successive surge in buying pressure. The close above and subsequent cross between the 50-day and 200-day moving averages in March of this year was a signal of a reversal in trend, and at that point, the role of the average changed to one of support. Notice how the red line has propped up the price on each pullback in 2016 and how the recent decline stopped exactly at the support level. Traders will likely bet on a bounce higher from here and will undoubtedly continue to keep a close eye on the 200-day moving average as a guide for placing their stop-loss orders. (For more, see: Active Traders Turn Bullish On Silver).
The Bottom Line
Recent volatility has spooked many investors and has circles talking about an impending downtrend. However, after analyzing the charts of key commodity-related assets, it appears that now could be the time to buy rather than to panic and run for the exits.(For more, see: The Uptrend In Commodities Is Just Getting Started).