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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • 3 S&P Beating Commodity Picks 0 comments
    Sep 1, 2011 11:05 AM | about stocks: DBC, RJA, RJI

    The evidence is now quite strong that these markets have bottomed, meaning a short-term pullback would be a good chance to jump in on these broad-based sector ETFs and ETNs.

    Commodity markets dropped along with stocks in early August, as concerns over the health of the economy reached a fever pitch after the debt downgrade.

    As stocks have rebounded from the August lows, the major commodity indices, as well as the commodity ETFs and ETNs, have been even stronger. The charts indicate that the correction from the May highs has been quite normal, and there is strong evidence now that the lows are in place.

    This suggests that global economies—especially the emerging markets—may be in better shape than most think. The broad-based commodity ETFs and ETNs are now testing strong resistance, so a near-term setback looks likely, but this should be a good buying opportunity.

    chart
    Click to Enlarge

    Chart Analysis: The daily chart of the Reuters CRB Index shows that the flag formation, lines a and b, has been completed. This correction looks similar to what occurred in 2010 (green circle), as the CRB then had a six-month correction that ended in July 2010.

    • The decline from the April highs at 691 was quite shallow, as it only lost 11% through its early August low of 615.50
    • The index is now close to stronger resistance near 660, with more important levels in the 675 to 680 area
    • The minimum upside target from the triangle formation is in the 700 to 720 area
    • The relative performance or RS analysis broke out of its trading range (lines c and d) in early August. This signaled that is was starting to outperform the S&P 500. This trend is likely to continue
    • There is initial support now at 635 to 645

    The Elements Rogers Total Return ETN (RJI) was designed to track the global consumption of a basket of 36 commodities. It holds 35% in agricultural commodities, 21% in both precious and base metals, and the remaining 44% in energy.

    • RJI peaked at $10.51 in April and violated the 50% Fibonacci support level in early August, as the low was $8.54. The more important 61.8% support is at $8.15
    • Wednesday’s close was above the downtrend, line e, suggesting that the corrective pattern has been completed
    • There is a band of daily chart resistance in the $9.70 to $9.90 area, which should limit the upside over the near term
    • The daily on-balance volume (OBV) has broken its downtrend, line g, but so far the volume has lagged that of the early August decline. The weekly OBV (not shown) did confirm the April highs but is currently below its WMA
    • There is initial support now around $9.10 to $8.90

    chart
    Click to Enlarge

    PowerShares DB Commodity Index ETF (DBC) is more narrowly focused than RJI, as it includes commodities like sweet crude oil (West Texas Intermediate, or WTI), heating oil, RBOB* gasoline, natural gas, Brent crude, gold, silver, aluminum, zinc, grade-A copper, corn, wheat, soybeans, and sugar.

    • DBC shows a broad trading range (lines a and b) since the April highs of $31.99
    • There is key resistance in the $30.70 to $30.92 area, and a close above $31 would complete the corrective pattern and give upside targets in the $33 to $34 area
    • The RS line has already broken out to the upside, as resistance (line c) has been overcome. This indicates that DBC should continue to outperform the S&P 500
    • The daily OBV has also moved through resistance, line d, which is a bullish sign. The weekly OBV (not shown) is very close to moving back above its WMA
    • There is short-term support now at $29.45, and the rising 20-day EMA provides stronger support at $28.50 to $28.80
    • The 38.2% retracement support at $27.75 was briefly broken in August. The 61.8% support level is just above $26.50

    The Elements Rogers International Agricultural Total Return ETN (RJA) is a fairly pure agricultural play. It corrected from the February highs at $11.95 and hit a low of $8.60 in early August.

    • The rally from those lows has been strong enough to complete the flag formation, lines e and f
    • RJA is now approaching the stronger resistance in the $10.90 to $11.10 area
    • The RS analysis shows a similar break through its downtrend, line g, as it had started to gain strength versus the S&P 500 in mid-summer, line h
    • The daily OBV moved through its downtrend (line i) in July and is above its rising WMA.
    • The weekly OBV (not shown) has already moved back above its WMA which is positive.
    • Initial support now in the $10.40 area with stronger in the $10 area.

    What it Means: In July, there were signs that the commodity markets had bottomed, but the drop in early August cleared out us early buyers.

    The evidence of a bottom is now much stronger, and therefore a pullback over the next week or so should provide a good buying opportunity for what could be a strong fall season for the commodity markets.

    How to Profit: As recommended in May, buyers of the Elements Rogers Total Return ETN (RJI) were 50% long at $9.24 and 50% long at $9.08 was just stopped out at $8.57—ouch!. Would go 50% long at $9.14 and 50% at $8.84, with a stop at $8.39 (risk of approx. 6.6%).

    As recommended in July, buyers of the PowerShares DB Commodity Index ETF (DBC) went 50% long at $30.06 and 50% long at $29.77, and both stopped out at $28.66. Would go 50% long DBC at $29.54 and 50% at $28.96, with a stop at $27.24 (risk of approx. 6.9%).

    Should be 50% long Elements Rogers International Agricultural Total Return ETN (RJA) at $9.96, with a stop at $8.94. Raise the stop now to $9.44.

    Those not long could still go 50% long RJA at $10.38 and 50% long at $9.98, with a stop at $9.44 (risk of approx. 7.3%).

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