Precious and base metals were the darlings of the commodities market in 2016, but based on the price action so far in 2017, it appears as though the strong upward trends are unlikely continue. In this article we’ll take a look at the chart patterns of several commodity-related ETFs to highlight the forecasted selling pressure and try to determine how active traders will look to profit. (For more, see: These Charts Suggest Metals Are Headed Lower).
PowerShares Global Gold and Precious Metals Portfolio
One of the most interesting chart patterns found anywhere in the commodities market belongs to that of the PowerShares Global Gold and Precious Metals Portfolio (PSAU). For those unfamiliar, this fund is comprised of holdings that are designed to track the overall performance of the most liquid, globally traded companies and involved in gold and other precious metals mining-related activities. As you can see from the chart below, the resistance of the 200-day moving average (red line) prevented the bulls from sending prices higher earlier in the year. It is interesting to note how this level was once used as a level of support as evident by the price action in Sept-November 2016, but this role reversed itself once the price broke below in mid-November. Strong resistance from the 200-day moving average is the backbone of many trading strategies and many bearish traders will look to place orders as close to the $20.66 as possible. Stop-loss orders will likely be set several percentage points above the swing high in case of a fundamental shift in global risk appetite. (For more, see: The Downtrend In Precious Metals Is Poised To Continue).
iPath Bloomberg Commodity Index Total Return ETN
Commodity traders interested in gauging the future direction of the broad commodity market are turning to the iPath Bloomberg Commodity Index Total Return ETN (DJP). While this fund holds a diverse set of commodities, metals make up approximately 30% of the fund’s weighting. Given the strong exposure to metals, combined with the analysis of the PSAU above, this fund is now of increased importance for those looking for tools to profit from falling metals prices. As you can see below, the bears have recently pushed the price of the DJP fund below the support of its 200-day moving average. This close below the 200-day moving average is a technical sell signal, but more importantly, the 50-day moving average also just crossed below its 200-day moving average, which is one of the most popular technical trading signals that suggests this is the start of a long-term downtrend. Like the case discussed above, bearish traders will likely set their stop-loss orders above the 50-day/200-day moving averages to protect against a sharp fundamental shift. (For more, see: Base Metals Running Into Resistance).
SPDR S&P Metals and Mining ETF
The last ETF that we’ll look at today is the SPDR S&P Metals and Mining ETF (XME). Of the commodity ETFs mentioned so far, XME would be considered the laggard of the group since it is still trading above key support levels and hasn’t technically broken down yet. With that said, using the charts above as leading indications, active traders will likely be watching for a drop below the 200-day moving aveage and for the 50-day moving average to follow shortly after. Stop-loss orders will likely be set above the 50-day moving average in case of a major shift higher. (For more, see: 5 Charts That Suggest Gold Stocks Are Headed Lower).
The Bottom Line
Commodities had a tremendous run in 2016, but so far in 2017 it appears as though the good times have come to an end. As discussed above, key commodity-related funds have recently fallen below key technical support levels and appear poised for further moves lower. Bullish traders may choose to wait it out on the sidelines until the patterns shift and start signaling a move higher again. (For more, see: These Commodity Stocks Suggest That the Downtrend Will Continue).