Where Fundamentals Meet Technicals: BCX - Yield 5.4%

Summary

• Risks of future inflation are rising.
• BCX is a CEF invested in metals, energy, and agriculture, thus providing some hedge against inflation.
• BCX pays a monthly dividend.
• Looking for more investing ideas like this one? Get them exclusively at Stock Waves. Learn More »

Photo by Anna Bliokh/E+ via Getty Images

Authored by Jason Appel of StockWaves, along with Rida Morwa of High Dividend Opportunities.

This series of articles is intended to provide Elliott Wave and Fibonacci Pinball Analysis as accompaniment to Rida Morwa's High Dividend Opportunities (HDO) Service. Our goal is to provide greater context as to where price is within the trend for the opportunities being presented by Rida Morwa's High Dividend Opportunities (HDO) group. This will include support regions for potential entries and target regions for the bigger trend.

Thinking about a future inflation hedge?

"...There are several factors at play that will create a "ripe" environment for a much higher inflation level in the years 2023 and beyond. Such factors include excess liquidity, overprinting dollars, excess government spending, excess borrowing, irrational high asset valuations, and a late (or a pre-emptive move) by the Fed to control inflation.

Inflation can be devastating for retirees or those preparing for retirement. Investors must always look forward and factor in inflation expectations before making investment decisions. This is even more devastating for those who cannot offset inflation with higher paychecks, such as retirees, or near retirement. The good news is that there are some strategies which - if carefully followed - can provide a degree of protection from this risk and help you grow your income faster than inflation."

- Rida Morwa from his 4/4/2021 article titled Trade Alert: The Inflation Problem For Investors.

This article will provide technical analysis supporting Rida's Buy Alert on NYSE:BCX, BlackRock Resources & Commodities Strategy Trust.

"As promised, that we will be providing additional "inflation protection," we are adding another Closed-end Fund (or CEF) to our portfolio that I consider one of the best-hedged against inflation. The CEF is BlackRock Resources & Commodities Strategy Trust which currently yields 5.4%."

- Rida Morwa, from the aforementioned article

BCX is a monthly dividend-paying closed-end fund that currently yields 5.36% and trades at a 4.79% discount to NAV. Its holdings are 88% in large-cap companies and their sector exposure breakdown is as follows:

Source: Blackrock.com

Though energy prices are not factored into CPI, this particular mix of sectors is likely to provide some hedge against inflation as the underlying commodities of these sectors have the potential to be sensitive to inflationary pressure. Rida is particularly bullish on energy:

"We have increased the allocation to the energy sector from 3% to 5%. Not only are we bullish on the energy sector, but it is recession resilient ones that we expect to do very well over several years. We will be adding some commodity picks (not just energy) over the next few months, and probably increase our allocation to this caption again by year-end."

- From Rida's 4/4 Update on Portfolio Strategy and Allocation Changes.

BCX has primarily been in a downtrend since inception in March 2011. In that time, the metals, energy, and agriculture have been in bear markets for the better part of the last decade, but all look to have completed significant bottoms into the 2020 lows. From the end of 2019 into the March 2020 low, BCX crashed, dropping nearly 60%. However, since then, BCX has strongly reversed upwards, rallying 126% into the end of 2020 to close the year down only 8.18%. The strength has continued into 2021, with price reaching a post-market high of $9.62 on March 8, up 29.8% on the year and extending the rally off the March 2020 low to 194%.

In our study of Elliott Wave, we observe great strength in this rally, indicating strong potential for a lasting bottom to be in place with tremendous gains to come in the mid-to-long term. The rally consists of a series of 5 wave structures to the upside with subsequent 3 wave corrections, which we see as forming a base for a much larger rally. The initial 5 wave rise into the early June high, labeled (1) (see accompanying chart below), was the first in the series, and was followed by a 3 wave corrective pullback (labeled ABC) into the late October low reaching only a very shallow 23.6% Fibonacci retracement. From there, price rocketed up to the January high in another 5 wave rally with a near-perfect hit of the .618 Fibonacci extension, completing wave 1 of (3) prior to pulling back correctively once again. This wave 2 pullback was very brief, completing at the January 29th low and followed by another 5 wave rally, labeled wave circle i.

For a little reference, Elliott Wave analysis identifies motive patterns in the direction of the trend (in this case up since the March 2020 lows) as 5 wave moves and those of the impulsive variety, like BCX exhibits, have 5 wave moves consisting of smaller degree 5 wave moves. The best example of this here is the labeling of the first wave (1). As such, we see price now within wave (3) - which is considered typically to be the strongest wave of the larger move- being composed of a smaller 5 wave waves, with its subwaves once again labeled 1,2,3,4,5, and we can even see that within wave 3 of (3) we have the labeling: circle i-ii-iii-iv-v to compose the entirety of that subwave. Stocks forming a pattern with an observable (1)-(2), 1-2, i-ii structure are set up for immensely strong breakout potential.

So, with price having formed a series of 5 wave rallies and 3 wave pullbacks, we have a confident setup for a strong rally. In fact, it's quite reasonable that BCX could reach the target for wave 3 of (3) at the 1.236 Fibonacci extension, or $13.30 well inside of 2021 alone, nearly 50% from the April 1st close, $8.94.

Currently, support for wave circle ii sits between $8.48 and $8.85. The interpretation presented is valid so long as price remains above the January 29th low of $7.90. If price were to break that low, our alternative interpretation is still quite bullish on the medium and longer term, but price would need to find a new low in wave 2 with current lower support between $6.80 - $7.75. It's very unexpected at this time that price could dip into the lower support level, but if it did the larger bullish perspective is still quite intact unless price were to break the late October lows of $5.55.

While $13.30 is the minimal swing target for this setup, overall we see BCX demonstrating favorable potential to rally north of $20 in the coming years. As such, the current support zone and the lower support zone--should price get there--would enable very favorable risk-to-reward entries for long positions

Analyst’s Disclosure: I am/we are long BCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.