Commodities Preparing to Run Higher

by: Jim Farrish

Commodities as a sector are in the midst of a pause in the uptrend. After a test of support in November, most have made a move back towards the November high. What is the outlook currently and can the sector return to its market leading ways? If we break down the parts we can gain a better perspective which will provide some answers to the whole.

Precious metals have been the topic of conversation for quite some time. PowerShares Precious Metals ETF (NYSEARCA:DBP) has held support above the 30 day simple moving average during this move off the August lows. The current test has held and is poised to move back to the upside. Gold has held support above the $1380 level and could be ready for a move back towards the recent highs. China’s delay on raising interest rates could prompt a boost to the metal. Silver is in a similar situation holding support and ready to push back towards the highs. Precious metals have become more volatile of late and that should be taken into consideration when determining any positions.

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Sticking with the metals, base metals dropped more than 10% in November and then bounced. They are currently consolidating after capturing half of the loss back. Why the recent volatility? The first wave to the downside came on the heels of speculation relative to China. The concerns of actions taken by the government to slow growth would stall the economy and thus demand. Thus far that hasn’t happened, but the fear or threat remains the primary concern.

Copper (NYSEARCA:JJC), since the November decline, has moved back above the November high. Steel (NYSEARCA:SLX), likewise, has made a move back above the November highs. The balance of the base metals are still lagging and the sector is poised to move higher. PowerShares Base Metals ETF (NYSEARCA:DBB) is a good barometer for the overall sector to watch. I would look more at copper and steel to play versus the sector as a whole.

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Agriculture commodities had a similar pullback as the base metals in November. They have since bounced, but spent the last week consolidating and looking for a catalyst to move higher. Food costs have been steadily rising sparking some fear relative to the consumer longer term.

PowerShares Agriculture ETF (NYSEARCA:DBA) gives a good look at the broad sector overall. The uptrend remains intact with a test of support at the $30 level under way. Watch the parts, as well, for some indication of leadership. Cotton (BAL), coffee (NYSEARCA:JO) and sugar (NYSEARCA:SGG) have been the leaders. The agribusinesses (NYSEARCA:MOO) have shown a similar trend to the commodities and bear watching as well.

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Last, but not least, the energy commodities led by crude oil and gasoline have been the leaders following the November test of support. Crude touched $90 per barrel last week and analysts are calling for $100 per barrel by year end. Those numbers may be aggressive short term, but the potential for crude to eclipse the $100 mark and hold it in the first half of 2011 is definitely a possibility.

Equally, gasoline (NYSEARCA:UGA) pushed to a new high, jumping more than 12% since the November low. This is reflected at the pump with prices moving above $3 per gallon. The impact of higher fuel cost is inflationary. The impact trickles down to everything and will have a negative impact on the consumer. Coal (NYSEARCA:KOL) and Natural Gas (NYSEARCA:UNG) are moving higher, as well, showing the pressure equally across the energy complex. The test of the break above resistance in crude and gasoline is in play. They are poised to move higher short term, leading the commodities as a sector.

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The current pause or test in the commodities complex is an opportunity to put money to work in the sector as a whole, or to find the components which are leading the broad sector higher, and focus your efforts. Either way, the sector is setting up to break higher. Put a plan in place to take advantage of the continuation move as it materializes.

Disclosure: No positions