Weekly Technical Market Outlook 4/21/2014

I hope everyone had a good weekend and a Happy Easter. I was out-of-town visiting family this past weekend so I did not have time to write a full Technical Market Outlook, but I do want to share a few thoughts….

-With the bullish move we had last week the trend of the S&P 500 ($SPX) is back above its 20-day and 100-day moving averages. The 100-MA has been an important level of support for the current up trend and it was good to see it hold on that short-term drop.

-Breadth has improved along with momentum as the Relative Strength Index held the level of support I mentioned last week. The NYSE Advance-Decline Line hit a new high but the Common Stock-Only Advance-Decline Line has yet to break out.

-This week I’ll be keeping a close eye on commodities. Specifically the PowerShares Multi-Sector Agriculture ETF ($DBA), which is closing in on its March high of about $29. I’m looking to see if ag commodities can break out or if the divergence that may be developing in momentum and volume keep this asset class from experiencing a second leg higher.

Be sure to check back later this week I’ll have some more content up on the blog. Have a great week!

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Commodities Rally But May Need A Breather

To start the year I said my one prediction for 2014 was that commodities were too beaten down and could rally. We finished 2013 with sentiment at historic lows and it seemed everyone had turned their back on this asset class.

In Phil Pearlman’s Yahoo! Finance article, 2014 Predictions from Some of the Smartest Market Watchers I said:

Sentiment for agriculture and metals are at or near historic lows. For example, nearly all three categories of the Commitment of Traders report, Commercial, Large Traders, and Small Traders are short or near a net-short position for gold. Typically we see the most hated areas of the market one year rotate back to strength the following year. I’ll be watching to see if this happens for the commodities market in 2014. While commodities are very weather dependent, there’s a chance we see at least a partial rotation back to the beaten down agriculture and metal markets.

Well I didn’t expect commodities to rally as fast as they have. Year-to-date the PowerShares Agriculture ETF ($DBA) is up nearly 11% and gold ($GLD) has advanced 7% while the equity market has gained just 1%. I still think commodities could see higher prices, especially with the awful winter most of the country has been having as well as the drought that’s hit the west coast.

However, I think the current rally is becoming a little overextended and must now contend with trend line resistance. Below is a weekly chart of the PowerShares Multi-Sector Agriculture ETF ($DBA) going back to 2010. I’ve drawn a blue line to connect the previous highs and this takes us to where price currently sits this week. $DBA has broken out of its weekly Bollinger Bands, as has the Relative Strength Index which is in the top panel of the chart. With stocks not replicating the 2013 pattern of “never go down” traders appear to have come to the realization that there are in fact other asset classes to own! The difference in the current rally compared to what we saw in 2010, was the slow advance that took commodity prices to historic highs. We rarely saw price break above its upper Bollinger Band on the weekly chart as buyers formed an orderly line to pick up their shares.

I would be comfortable with seeing $DBA consolidate at current levels or test the previous high near $26 from last October. This would allow those that have missed the boat the opportunity to participate and potentially take the ETF to its 2012 high of $31.

DBATaking a look at sentiment, specifically the COT data set, we can see traders have pushed this measure near historic levels. SentimenTrader creates this Commodity COT Master Indicator to show a global picture of commodity sentiment and how traders are currently positioned. While we aren’t there at highs yet, we are approaching a level that has previously cooled off rallies in the past.

COT Sentiment

Commodities are still an asset class I am watching for 2014 and is a place we may see traders seek shelter during any increase in volatility within the stock and bond markets. We’ll see what happens.

Source: SentimenTrader

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Have Commodities Bottomed?

The agriculture industry has been taken some hits in 2013, down over 6% YTD and almost 15% from its high last September. There was an expectation that this would be a big crop year for corn, with the USDA  estimating that this year would see the highest corn acreage since 1936. Well it’s been a wet Spring for much of the Midwest, with reports of flooding in certain areas. This has pushed back planting of many crops, although there is still a few weeks left to get seed in the ground. Traders seem to be ignoring the weather reports and have pushed agg prices lower.

Today we are going to look at the PowerShares Multi-Sector Commodity Agriculture ETF ($DBA). Momentum, based on the RSI indicator, has been diverging from price since mid-February as it puts in higher lows. While $DBA has been hitting lower lows, the Relative Strength Index has been able to exit oversold territory and make an attempt at breaking above 50. As I’ve discussed in previous posts, when RSI is unable to break above the bearish range that has resistance around 50-60, we can extrapolate that bulls are holding weak hands. We saw a test of 50 in late January and again earlier this month before we finally broken above.

The 50-day Moving Average has been acting as resistance since the peak in September. Over the last two days price has been able to break above the moving average, following momentum’s led higher. However, with the last couple days of strength $DBA has broken above its upper Bollinger Band. It would be healthy for price to take a breather over the next day or two as the Bollinger Bands expand, however this doesn’t mean price can’t advance without some type of consolidation.

commodityLooking at the COT data, we see that commercial traders, the ‘smart money’ now has a net-long position in corn, which accounts for 12% of $DBA. Commercial traders haven’t had a net-long position since June of last year – right before corn jumped from $6 to $8. We also saw commercial traders take a net-long position as corn prices bottomed in 2010 and rose 100% over the next 12 months. Typically we see these traders holding net-short positions as a hedge to other positions or crop production, so when a shift is made to net-long, a large change in price is likely. Corn has reacted positively to this bullish COT data, rising 5% in the last two days.

The weather over the next few weeks will likely have a large impact on the future of crop prices and how much progress farmers across the country are able to make. But based on the chart of the agriculture ETF and corn, things seem posed for appreciation. I’ll be watching to see if $DBA can hold its 50-MA, if momentum can put in a floor around 50, and if the ‘smart money’ makes continues to take on more long positions in the agg space.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.