3 Charts That Commodity Traders Will Want to Watch

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3 Charts That Commodity Traders Will Want to Watch

Over the past several years, commodity traders have profited from some of the strongest uptrends found anywhere in the public markets. As we’ll discuss in thisarticle, the defined levels of support, as measured by ascending trendlines, have provided consistent entry positions for strategic traders looking to gain exposure. In recent weeks, bullish traders seem to have lost some of their conviction, and prices have started to consolidate. The recent introduction of sideways momentum is now dominating the price action and seems to creating clear levels of support and resistance. When broken, these levels will likely define the direction of the next leg of the long-term trend. (For further reading, see:3 Charts That Suggest It’s Time to Buy Commodities.)

Active traders seek to exchange-traded funds (ETFs) like the Invesco DB Commodity Index Tracking Fund to acquire exposure to a diverse basket of the world’s most in-demand commodities. For the second part of 2017, the fund traded following a significant rising trendline, as seen below. Based on the chart, traders would have expected the uptrend to continue for the most of 2018, but the break below the support in early summer signaled that momentum was fading, and the fund has been trading in a channel pattern ever since. Active traders will be watching the dotted trendlines closely since a closing above one of them will almost certainly be used as a stimulus for a greater move in the direction of the breakout. Based on the close support of the 200-day moving average, we anticipate traders to maintain an upward bias and to put their stop losses below the psychological $17 level in the event of a surprise sell-off. The price targets will most likely be placed at the 2018 swing high of $18.47. (For further information, see Technical Analysis: Chart Patterns.)

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The flag pattern is one of the most regularly used chart designs. This consolidation pattern is discovered by recognizing assets that are trading inside short-term descending channel patterns during a long-term upswing. The downward-sloping trendlines on the iShares Commodities Select Strategy ETF chart have been creating clear levels for placing buy and stop orders, but the recent test of the support of the 200-day moving average suggests that the bulls are still in control and that a breakout beyond the resistance could be a matter of days away. If the barrier is overcome, most active traders will set their short-term target prices at $40, and then possibly substantially higher if the 2018 high is broken. (For further information, see Chart Pattern Analysis: Flags and Pennants.)

The symmetrical triangle pattern, which can be seen emerging on the chart of the Materials Select Sector SPDR Fund, is another prominent consolidation pattern. As with the previous patterns, a break beyond one of the designated trendlines would indicate a breakout in the direction of the move. Based on the combined support of the long-term moving averages and the lower trendline, we anticipate traders will maintain an upward bias and wait for a closing above $60 before wagering on a move higher. (For further information, see Triangles: A Short Study in Continuation Patterns.)

The Bottom Line

Commodities have been trading inside clear uptrends for some years, but recent spells of consolidation have some traders anxious about a reversal. Given the above analysis, we would anticipate traders to keep a careful watch on the patterns and maintain an upward bias owing to the local support of long-term moving averages. Most commodities might have a solid end to 2018 if they break over the current resistance. (For further information, read Long-Term Traders Are Positive About Commodities.)

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StockCharts.com provided the charts. Casey Murphy had no position in any of the securities mentioned at the time of publication.

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